Ninth Circuit Analyzes AB 5 in Class Action Ruling | Article

The Ninth Circuit recently reviewed a district court’s handling of a class action involving claims of employment misclassification. Bowerman v. Field Asset Services, Inc. is instructive for at least two reasons: It provides guidance on how corporate defendants in employment misclassification class actions can defend themselves and further analyzes the different tests trial courts can employ for determining liability under such claims — Dynamex‘s so-called ABC Test or its predecessor, the multifactor Borello test.

Fred and Julia Bowerman led a class of independent contractors who performed work in California on behalf of the defendant Field Asset Services, Inc. (FAS). FAS is in the business of “pre-foreclosure property preservation services” but does not conduct the work itself. Rather, it retains third-party independent contractors or “vendors” — some of whom are sole proprietorships and others that are corporations with their own employees.

In 2013, Bowerman sued FAS claiming that FAS misclassified him and his fellow class members as independent contractors rather than employees. Four years later in March 2017, the US District Court for the Northern District of California certified the class, granted the plaintiffs partial summary judgment on liability, and left damages for trial. In Determining whether Bowerman was an independent contractor or employee, the district court applied the common law test established in SG Borello & Sons, Inc. v. Dept. of Indus. Relations. The Borello The test focuses on the degree of control the alleged employer exercises over the worker, along with eight secondary factors, including whether:

  • The work involves a distinct occupation or business;
  • The worker performs the tasks at issue with or without supervision;
  • There is a higher level of skill required;
  • The alleged employer or the worker supplies the instrumentalities and the location for the work;
  • The work requires a longer or shorter length of time;
  • The method of payment is determined by the job or by the time the worker spends;
  • The work is part of the alleged employer’s regular business; and
  • The parties believe there is an employer-employee relationship.

Applying Borello, the district court determined an employment relationship existed between FAS and its vendors because FAS retained control over things like invoicing, evaluations, and disciplining vendors regarding their work. The district court then held a bellwether jury trial to adjudicate Fred Bowerman and 10 other class members’ damages. However, the trial did not result in any determinable measure of damages because of a lack of records and any common method for determining the overtime work the class members allegedly performed.

FAS moved to decertify the class. The district court denied the motion but acknowledged that determining damages would be “far messier” than previously thought. In July 2018, FAS appealed.

Before FAS’s appeal, the California Supreme Court decided Dynamex Operations West, Inc. v. Supreme Court. As we have written on other occasions (see here and here), Dynamex precludes application of Borello in certain circumstances and instead created a different test for determining the existence of an employment relationship, the ABC Test, which presumes a worker is an employee unless the alleged employer can satisfy all three of the following factors:

  • The worker is free from control in the performance of the work both in contract and fact;
  • The work at issue is outside the usual course of business of the alleged employer; and
  • The worker is engaged in a trade or profession of the same nature as the work he/she performs.

On appeal, FAS argued class certification was improper because the plaintiffs failed the predominance requirement of Rule 23(b)(3), requiring the plaintiff to establish FAS’s liability or damages by common evidence, and the Ninth Circuit agreed. The court of appeals reasoned that determining FAS’ liability to any class member would require individualized inquiries (eg, whether the individual worked enough hours each week to be entitled to overtime compensation and whether the individual incurred expenses that were entitled to repayment). In sum, the court of appeals held that the class members could not prove damages traceable to conduct at issue and further lacked a method of calculating damages to the extent they existed.

Next, the Ninth Circuit determined which test — Dynamex‘s ABC Test or Borello‘s multifactor test — applied to the claims for overtime compensation and expense reimbursement. The court explained that the law does not require universal application of Dynamex. On the contrary, Dynamex only applies to questions coming out of a California wage order. Because the plaintiffs’ claims for overtime compensation arose from a wage order, they required analysis below Dynamex. Meanwhile, the class members’ claims for expense reimbursement for work on behalf of FAS arose out of California Labor Code § 2802, not a wage order. Hence, the nine-factor test in Borello was the proper test for the expense reimbursement claims and not Dynamex’s ABC Test.

FAS challenged the application of Dynamex in another way as well. FAS argued Dynamex was only applicable to misclassification claims, not claims of joint employment, and the court of appeals agreed. Recognizing this important distinction, the court explained that the purpose of Dynamex’s ABC Test is to address instances where a hiring entity attempts to evade their responsibilities as an employer by categorizing workers as independent contractors. But in joint employment situations — where the worker is an employee of one entity but also claims employee status under another hiring entity — the worker presumably has employment protections in place. Thus, the court clarified that because of the concerns Dynamex’s ABC Test seeks to address are not present in joint employment situations, Dynamex does not control.

Ultimately, the court remanded the case on this issue and instructed the district court to determine which class members were employees of an FAS vendor. The district court would evaluate those claims as seeking relief under a theory that FAS was a joint employer. As the Ninth Circuit instructed, Borello would apply to the claims of those plaintiffs and Dynamex would apply to the claims of sole proprietors, subject to certain caveats we explain further below.

The Ninth Circuit then examined the district court’s grant of summary judgment on the issue of liability. The court of appeals reversed the district court’s grant of summary judgment on FAS’s liability on claims for expense reimbursement. The court held a jury applying the Borello factors could have determined that FAS’s methodology for prescribing instructions and evaluating work was simply a way for achieving the results it sought — and not the means the vendors used to achieve them. In sum, the fact that FAS did not mandate who performed the work, when the worker performed it, or even whether the vendor accepted the job FAS offered all weighed against the control necessary for the existence of an employment relationship. Similarly, the court found that Borello‘s secondary factors remained the subject of dispute, as FAS itself conceded at the district court.

In evaluating the overtime claims, the Ninth Circuit applied the ABC Test and found there were genuine issues of material fact regarding parts A (control) and C (the class members’ engagement in an independent trade, occupation, or business). With regard to part B (whether the work the alleged employee performs is outside the usual course of the alleged employer’s business), FAS argued that it did not perform the preservation services but merely coordinated them. The court rejected this argument, observing FAS itself advertises its provision of the services at issue and analogizing this case to one involving Uber’s ridesharing application and the platform’s drivers. The court of appeals, thus, upheld summary judgment on part B. Thus, FAS failed to satisfy all three parts of the ABC Test and so under Dynamex an employment relationship existed for the purposes of the overtime claims.

However, the court also noted that the California legislature recently enacted a business-to-business exception to the ABC Test. Under this exception, the ABC Test does not apply to genuine contractual relationships between an alleged employer and a separate entity providing services. In such instances, a trial court needs to apply Borello to the employment analysis. On this basis, the court remanded the case to determine if the exception applied to any of the claims at issue.

Bowerman serves as a guide for how franchise systems with sole proprietors and corporate entities with their own employees can defend against employment misclassification claims. It also further clarifies the ongoing interplay between the two prevailing tests — Bowerman and Dynamex — that California courts will use in similar cases. As more jurisdictions adopt the ABC Test, cases like Bowerman could have application in other parts of the country as well.

This article was written with the assistance of summer associate Zach Zahn.

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