California Court Clarifies Meaning of 'Hiring Entity' Under 'ABC Test'

​California's "ABC test" is used to determine whether a worker is an employee or an independent contractor for purposes of California wage laws. Former workers accusing a construction company of misclassifying them as independent contractors were not required to show that the company hired them before the ABC test could be applied to their claims, a California appeals court ruled.

The plaintiffs, unlicensed flooring installers, claimed that a general contractor was their employer and that they were misclassified as independent contractors.

The dispute at trial largely turned on the role of three workers who stood as intermediaries between the installers and the general contractor. The installers called them "supervisors," whereas the general contractor called them "subcontractors."

At trial, the general contractor claimed that it used independent subcontractors (the three supervisors/subcontractors) who were licensed to perform work that was not permitted by the contractor's license. Those subcontractors hired and paid the workers, and, according to the contractor, the subcontractors were solely responsible for any mistakes in categorizing the flooring installers or complying with labor laws.

The workers argued that the contractor had used a misclassification scheme, under which it placed a "man in the middle" between the company and the flooring installation employees. By classifying the flooring installers as subcontractors, the contractor avoided having to provide them with benefits or complying with labor laws.

The judge instructed the jury that it must first determine whether the workers were hired by the contractor or an agent of the contractor before applying the ABC test.

The jury returned verdicts in favor of the contractor on all counts, and the workers appealed.

The Dynamex Decision

Wage orders set minimum wages, maximum hours and basic working conditions for employees in California. In a 2018 California Supreme Court decision (Dynamex Operations West Inc. v. Superior Court, 4 Cal.5th 903), the state's highest court considered what standard applied in determining whether workers should be classified as employees or as independent contractors for purposes of the wage orders.

The Dynamex court adopted the "ABC test," under which a worker is considered an employee, unless "the hiring entity" establishes that:

• The worker 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.
• The worker performs work that is outside the usual course of the hiring entity's business.
• The worker is customarily engaged in an independently established trade, occupation or business.

The Dynamex court explained that while the wage orders did not define independent contractors or specifically explain their distinction from employees, the wage orders define "employ" to mean "to engage, suffer or permit to work."

The court concluded the "suffer or permit" standard applied to the question of whether a worker was an employee or an independent contractor.

Jury Instructions

On appeal, the workers claimed the trial court erred in instructing the jury that before the ABC test would be considered, the workers must first prove that they were hired by the contractor or an agent of the contractor.

The workers argued that this instruction conflicted with the Dynamex decision and undermined its policy goals.

The contractor argued that the ABC test is a classification test that places the burden of proof on the "hiring entity." An entity not involved in a worker's hiring cannot be the "hiring entity" and thus cannot be liable for misclassifying a worker. The contractor noted that the Dynamex court used the term "hiring entity" over 40 times.

The appellate court here agreed with the workers. While the Dynamex court repeatedly referred to the "hiring entity," it never suggested that the term was intended to limit the scope of the ABC test, the appeals court said.

Interpreting the Dynamex court's ABC test to include a threshold hiring test, with the worker bearing the burden, would run counter to the intent of the California wage and hour laws, which are remedial in nature and must be liberally construed in favor of affording workers protection, the court noted.

It therefore concluded that the term "hiring entity" was selected for its neutral connotations and not as an unannounced prerequisite to the ABC test.

The court ruled that because the jury had been misinstructed, the verdicts could not stand and the workers were entitled to a new trial.

Mejia v. Roussos Construction Inc., Calif. Ct. App., No. C087709 (March 25, 2022).

Joanne Deschenaux, J.D. is a freelance writer in Annapolis, Md.