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Package Express Costs Could Skyrocket Due to Court Contractor Ruling

New California state standard disrupts previously accepted relationships between independent contractors and those who use them.

The California Supreme Court’s recent decision that rewrote the independent contractor law in that state has created enormous uncertainty in some quarters, and outright consternation in others. If carried to its apparently intended conclusion—declaring vast swaths of independent contractors to be employees—predictions are that costs to customers will soar in the affected industries.

Just days after the April 30 decision was released, union forces seeking to organize independent truckers and car service drivers in the state leapt into action. Lawsuits were filed on May 8 arguing that workers for both Lyft and Postmates were improperly classified as contractors.

The lawsuits each use specific language aimed at conforming to the new three-pronged “ABC” test established by the California Supreme Court, which completely overturns previous independent contractor definitions in the state.

Under the new criteria, a worker will be considered an employee instead of a contractor unless the worker:

(A) Is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

(B) Performs work that is outside the usual course of the hiring entity’s business.

(C) Is customarily engaged in an independently established trade, occupation, or business.

Failure to meet any of the three criteria means the worker cannot be considered an independent contractor under the law and will be classified as an employee, meaning the employer will be required to meet all state laws regarding an employee relationship, including paying unemployment insurance and workers’ compensation premiums.

If courier firms are required to reclassify all of their drivers as employees, one courier industry CEO estimates that medical costs will be impacted as well—to the tune of a 30-40% jump in the delivery cost of essential items like time-sensitive documents, blood, organs and pharmaceuticals.

A Gift for Unions

Significantly, the decision also allows labor unions like the Teamsters a mammoth opportunity to organize a new workforce. The Teamsters union has been waging a decades-long battle to organize port drayage drivers, FedEx Ground drivers and more recently car service and delivery drivers working for companies like Uber, Lyft and Grubhub. Under the law, independent contractors are considered small businesses which are banned from joining together to negotiate the prices they charge for their services under antitrust statutes.

The root threat for those who currently use these kinds of contractors is Part B of the new ABC test. Other states like Illinois and Massachusetts also have ABC tests, which employers have learned to live with, but the California Court’s Part B differs significantly.

Other states that have ABC tests only specify that to be a contractor, the work must take place outside of the company’s physical location. However, the California Part B says the contractor must not be in the same course of business as the contracting organization. If you are a retailer and you hire a plumber to fix a broken pipe in your store, that person can be considered a contractor (which is the court’s own example).

Obviously, this creates an insurmountable barrier for trucking companies using owner-operators under lease because both of them are in the trucking business. The same problem exists for car service companies and package express carriers. In fact, the supreme court ruling arose when a nationwide delivery firm called Dynamex Inc. was sued by some of its delivery drivers in California who asserted they were really employees instead of contractors, and deserved to be paid the same wages and benefits as the company’s other employees.

On May 11, at the annual meeting of the Customized Logistics and Delivery Association in New Orleans, Dynamex president Scott Leveridge declared, “In my opinion, it is the person who is doing the work who should decide whether they are a contractor. That shouldn’t be up to the company or the government.”

He also said at that time that his company was mulling its next steps, but after the state supreme court decision legal observers have said they can see no additional legal recourse for Dynamex, a Canadian-based company that operates courier and package delivery operations throughout the United States.

Surveying the Horizon

As for other employers like Grubhub who are currently ensnared in long-running litigation over other classification issues, several parties reportedly have asked the California Supreme Court to clarify whether or not the new standard will be applied retroactively. Grubhub has told a federal appeals court hearing its appeal in long-running litigation that the Dynamex decision should not be applied retroactively.

The post-Dynamex decision lawsuits filed against Lyft and Postmates seek to certify their disputes as class actions, which could bring thousands of other workers into the lawsuits as plaintiffs. Both of these suits include claims of “willful misclassification” in violation of California law, in addition to pressing wage and hour claims.

There are differing views over how far the Dynamex decision extends in terms of all of the state’s employment laws. Attorneys with the law firm of Latham & Watkins contend that workers reclassified as non-exempt employees under the ABC test will be entitled to be paid according to the California Wage Orders, including minimum wage, overtime pay, and meal and rest breaks, unless such workers’ duties and pay qualify for an exemption.

“There will continue to be conflicting results in cases in which the same worker may be deemed an employee under some laws but found to be appropriately classified as an independent contractor under other laws in light of the varying tests applied,” the Latham & Watkins lawyers also point out.

Amy Epstein Gluck, an attorney with FisherBroyles LLP, stresses that independent contractors don’t have to be paid minimum wage and are generally not subject to other wage and hour laws—which means that shippers and carriers are staring at a big bill that unexpectedly and suddenly came due. Among the costs that these new employers will be forced to deal with in California are those associated with the protections of federal employment laws like civil rights protections, the Americans With Disabilities Act, Age Discrimination in Employment Act, or the Family Medical Leave Act and National Labor Relations act, and others that don’t apply to contractors.

In an interesting aside, attorney Andrew Sommer of the law firm of Conn Maciel Carey notes that California courts can be expected to continue recognizing independent contractor status for “traditionally recognized independent contractors,” such as attorneys, accountants and construction trades who may be viewed as performing services that are independent of the hiring entity’s business.

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