CAR And Supreme Court Decision On Independent Contractors Versus Employees


This Is CAR Position On The New Decision

Interesting. Time will tell as it always does.

May 2018

  • Dynamex Operations West, Inc. v. Superior Court, Charles Lee, et al. Real Parties in Interest

During the last five years, the challenges to the real estate salesperson independent contractor status have increased.  In a case unrelated to real estate, the California Supreme Court has issued a landmark ruling changing the common law factors test for employees for over 28 years to a new “ABC” test.   This test is in conflict with California real estate license law.  However, this potential conflict (under the factors test) was anticipated years ago and the legislature specifically stated in Business & Professions Code Section 10032 that real estate licensed salespersons and brokers may elect an independent contractor relationship even though they are subject to real estate laws including broker supervision and the law requiring salespersons to only be under one broker’s license.  Since specific targeted laws typically take priority over generalized pronouncements under rules of legal analysis, this specific law relating to the ability to have an independent contractor relationship as between brokers and salespersons should still apply to modify, or create an exception to, the non-real estate employment law case.

The case, Dynamex Operations West, Inc. v. Superior Court, Charles Lee, et al. Real Parties in Interest, was decided by the California Supreme Court on April 30, 2018.  It involved a trucking company which hired drivers who alleged misclassification of the drivers as independent contractors instead of as employees.  Prior to 2004 the drivers were employees but in 2005, the company changed them to independent contractors.  The drivers brought a class action.  The decision states the issue is of employee classification in one specific context: “…for purposes of California wage orders, which impose obligations relating to the minimum wages, maximum hours, and a limited number of very basic working conditions (such as minimally required meal and rest breaks) of California employees.” (Emphasis in original court decision.)

The Court applied a new “ABC” test that requires an independent contractor to pass ALL three tests:

A. That the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact.

B. That the worker performs work that is outside the usual course of the hiring entity’s business.

C. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

As to A, the real estate law requires a broker to supervise the licensed activity of the broker’s salespersons.  B&P Code § 10032 addresses that head on and indicates that if the broker and salesperson select an independent contractor relationship by following the three-prong/factors test in the US Tax Code, and also articulated in the California Unemployment Insurance Code (i) the individual is duly licensed under the B&P Code, (ii) substantially all remuneration is directly related to sales or other output, (iii) the services are performed pursuant to a written contract providing the individual will not be treated as an employee for state tax purposes), then the independent contractor status is recognized but does not remove the supervision or other regulatory requirements.   The same analysis applies for the requirement that a salesperson only be licensed to one broker.

The bottom line is, although this is a landmark case in changing the test, it will likely have little or no impact on those that strictly follow the three-prong test.   Both brokers and salespersons should be careful, particularly with transaction coordinators and administrative staff, and even unique team arrangements, that they still have their practices examined to make sure they are squarely under the three-prong test in California’s Code and do not create an issue by blurring the lines under the ABC test.  It is possible this will be challenged in the future, but to date, of the several cases filed, none have been decided on the merits and none have been able to certify a class action, the later of which is the honey attracting plaintiff’s lawyers.  All are advised to examine whether they have the most current Independent Contractor Agreement and should consider the one with the more robust arbitration clause that provides for individual arbitration with an outside vendor.

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