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COURT REPORTERS – INDEPENDENT CONTRACTORS OR EMPLOYEES?

The California Supreme Court’s recent decision in Dynamex created a new legal test for determining whether someone is an “independent contractor” and not an employee. In order to be properly classified as an independent contractor, the hiring entity must prove each of the three factors in the “ABC Test”: (A) 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; and (B) The worker performs work that is outside the usual course of the hiring entity’s business; and (C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. In the context of court reporters, the analysis will depend upon the particular facts and circumstances of each individual relationship.  While it is ultimately unclear how Dynamex will be applied to court reporters, this article provides a detailed legal overview to assist our members with understanding the key issues.

The Impact of Dynamex on Court Reporters – Are we all employees now?

On April 30, 2018, the California Supreme Court issued its decision in Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903. The decision has sent shockwaves throughout many industries, including those in the so-called “gig economy” such as Uber, Lyft, and Caviar. Indeed, on June 20, 2018, the California Chamber of Commerce and over seventy corporations and business advocacy groups sent a letter to Governor Jerry Brown and the California State Legislature imploring them to suspend or postpone the application of the Dynamex decision until the legislature can take a closer look at how the decision will impact California’s workers, businesses, and economy, and to perhaps craft a different test that takes into account the realities of today’s businesses and workers. On June 21, 2018, the California Labor Movement struck back with its own letter to the Governor and legislature “vehemently oppos[ing]” any effort to delay or alter the Dynamex decision. However, in all that has been written since the decision was issued, one industry has been largely overlooked – the court reporting industry.

Dynamex’s New “ABC” Independent Contractor Test

The Dynamex decision fundamentally changed the analysis courts are required to utilize for determining whether an individual is an independent contractor or an employee. While the California Supreme Court was careful to state that its decision only applied for purposes of compliance with California’s Industrial Wage Orders, the decision has more far-reaching implications because, as a practical matter, once an individual is treated like an employee for one purpose (e.g. meal and rest period compliance, payment of overtime and minimum wage), it is unlikely that they can be treated as an independent contractor for other purposes, such as compliance with the Labor Code or for tax classification. This is, in part, because the level of control required to ensure compliance with the Wage Orders would likely lead to a determination that the individual was an employee for other purposes as well.

Under the Dynamex decision, the burden is on the hiring entity to establish that all three factors of the “ABC Test” are met. Unlike the prior test articulated in S.G. Borello & Sons Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, in which no one factor was dispositive and courts balanced multiple factors to assess an individual’s status, post-Dynamex the hiring entity’s failure to prove any one of the three ABC Test factors will be sufficient to establish that the worker is an employee. Accordingly, in order to be properly classified as independent contractors, the hiring entity must establish all of following three factors:

A.    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; and

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

C.    The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed

Part A: The Control Test

This first factor, whether the worker is free from the control and direction of the hiring entity in the performance of the work, is nothing new to the independent contractor analysis. Indeed, the control factor was often the most important factor considered by courts, as well as federal and state taxing authorities, in reaching the independent contractor/employee classification determination. In Dynamex, the Court spent little time discussing this factor. Instead, it merely noted that a worker who is subject to the control of the hiring entity to the degree of control businesses ordinarily exercise over employees is going to be treated as an employee. This includes not only actual control, but whether the contract provides the hiring entity the right to control the worker. The Court further made it clear that this factor will be dependent upon the nature of the work and the overall agreement of the parties, and that a business need not control the precise details of the work in order to be found to have sufficient control to be the worker’s employer.

Part B: The “Outside the Usual Business” Test

The second factor hiring entities must demonstrate is that the worker performs work outside of the hiring entities’ usual business. This factor has caused the most concern for businesses because it appears to set a high bar for reaching a determination that a worker is an independent contractor. The California Supreme Court stated that “[w]orkers whose roles are most clearly comparable to those of employees include individuals whose services are provided within the usual course of the business of the entity for which the work is performed and thus who would ordinarily be viewed by others as working in the hiring entity’s business and not working, instead, in the workers’ own independent business. (emphasis added)” Accordingly, if a worker is performing services that are part of the hiring entity’s usual business, they will not be properly classified as independent contractors.

In discussing this factor, the Court did not provide much guidance on how courts should define a hiring entity’s “usual business.” The examples provided by the Court were those that few would quibble with – a plumber hired by a retail store to repair a leak is not working in the retail store’s “usual business,” whereas seamstresses working at home for a clothing manufacturer making dresses from cloth and patterns supplied by the company are working in the manufacturer’s “usual business” and would not be properly classified as independent contractors. However, the question is how broadly will courts define a company’s usual business, or how finely can companies split that hair? For example, is a law firm to be broadly defined as being in the business of practicing law so that a law firm may never retain attorneys on an independent contractor basis, or could a law firm without a family law practice retain a family law attorney on an independent contractor basis to assist with a single piece of litigation? This issue will likely be litigated for years to come, across multiple industries, calling into question the Court’s stated goal of providing more clarity for businesses and workers.

Part C: The “Independent Business, Occupation or Trade” Test

The third factor requires that the worker be engaged in an independent business, occupation, or trade of the same nature as the worker is providing for the hiring entity. In discussing the application of this third factor, the Court stated that the term “independent contractor” has been understood to refer to an individual “who independently has made the decision to go into business for himself or herself.” The Court went on to note that this commonly-accepted notion of independent contractor covers an individual who “generally takes steps to establish and promote his or her independent business – for example, through incorporation, licensure, advertisements, routine offerings to provide the services of the independent business to the public or to a number of potential customers, and the like.” The Court contrasted this individual with someone who a business unilaterally labeled an independent contractor in order to obtain an economic advantage.

Notably, however, because Dynamex requires the hiring entity to establish all three factors of the test, it may not be enough that the worker – by choice – actually has established himself or herself in an independent business. In fact, many workers prefer to be independent, in exchange for greater flexibility and often a higher income. On June 7, 2018, the Bureau of Labor Statistics issued its Economic Release regarding Contingent and Alternative Employment Arrangements Summary and found that “[i]ndependent contractors overwhelmingly preferred their work arrangement (79 percent) to traditional jobs.” Nonetheless, the Dynamex Court appears to have taken that choice out of the hands of workers in light of the reality that many businesses will no longer take the risk of hiring even the most independent of individual businesses if the services offered by the individual are in the “usual course” of the hiring entity’s business.

Moreover, the unique procedural posture in Dynamex has often been overlooked. Because the Court was reviewing the definition of “employee” in the context of a class of specifically defined individuals, its decision did not reach truck drivers who were employees or subcontractors of other persons or entities, or those who concurrently provided services to Dynamex and other companies or on behalf of their own personal trucking businesses. The Court glossed over the procedural posture of the case, and failed to address those individuals who were not a part of the case before it. This begs the question – can a business ever retain an individual operating his or her own business to perform the same services as offered by the hiring entity?

What Does Dynamex Mean for Court Reporters?

Court reporters in California have long operated as independent contractors through three typical structures. First, some California courts have moved from regularly employing court reporters directly (official reporters or pro tempore reporters), to contracting with court- reporting firms to provide court reporters on an as-needed basis. Many courts now provide court reporters for only mandated purposes, requiring litigants to retain court reporters if they want an official record of the proceeding. Pro tempore reporters work in the courts either on a direct hire basis (i.e. as employees) or on an independent contractor basis, typically through contracts with court-reporting firms. Nonetheless, even where court reporters are in court as independent contractors, courts often have strict requirements for how the court reporters must operate within their courtrooms, leaving courts to wonder whether, post-Dynamex, they are actually employers of all court reporters who serve in their courtrooms.

Second, many court reporters operate as “freelancers,” offering their services to court-reporting firms who connect them with work. These “freelance” court reporters appreciate the flexibility they have to accept or decline work, with many contracting with multiple firms or directly with any number of different clients. Post-Dynamex, these court reporters are asking whether they are – or even want to be – employees of one or more court-reporting firms that hire them. On the other hand, court-reporting firms are asking whether they can continue to contract with the freelancers or whether they must bring them all in as employees. Finally, many court reporters also perform CART and captioning jobs on behalf of many different entities. They are asking whether those services can continue to be provided on an independent contractor basis post- Dynamex. In sum, the court reporting industry is left, like so many others, wondering where they go in a post-Dynamex world.

The answer to these questions will ultimately depend upon how each arrangement is structured, and how each hiring entity’s “usual business” is defined. In the most straightforward context, a law firm which contracts with either a court-reporting firm or individual court reporter will not likely be viewed as the employer of the court reporter. That is because, no matter how broadly the “usual course” of law firms’ business is defined, law firms are not in the business of providing court-reporting services.

Court Reporters in the Courts

As noted above, the Dynamex Court stated that the ABC test for independent contractor status applies only in the context of compliance with the California Industrial Wage Orders. Most Industrial Wage Orders, including Wage Order 4 which is applicable to the courts, contain an express exemption from most provisions of the Wage Order for employees directly employed by the State or any political subdivision, including cities, counties, and special districts. However, two critical provisions in the Wage Order apply to courts – the sections setting forth the white collar exemptions (e.g. executive, administrative, professional1) and the section defining the terms “employ” and “employee.” Accordingly, in reaching the determination of whether a court reporter working directly for the court is an employee, Dynamex’s ABC test will apply.

First, courts are not in the business of providing court-reporting services to the public, thus, they may not have trouble meeting Part B of the ABC Test. However, in the broadest sense of the question posed by Dynamex – would a court reporter appearing in the court be ordinarily viewed as an employee of the court? The answer to that question could be “yes” depending upon how broadly a court’s “usual business” is defined, particularly because courts already directly hire court reporters who are bound by the same rules and policies. Nonetheless, even if courts could satisfy Part B of the ABC test, it is not clear whether they will meet Part A of the test (i.e. the control test). For example, whether a reporter is classified as an employee of the court or an independent contractor, the reporter cannot set his or her own rate for transcripts. (Govt. Code § 69950 (setting a per page fee for transcripts)2; see also Burd v. Barkley Court Reporters, Inc. (2017) 17 Cal.App.5th 1037 (holding that whether court reporters are employees of the court or hired by litigants, the statutory rate set in section 69950 applies to transcripts).) In some cases, reporters must also execute agreements with courts or follow strict local rules that set forth requirements for how the court reporters must provide the services they perform in the court.

For example, many courts require reporters to provide realtime, be on a court-approved list, sign stipulations agreeing to follow specific requirements of the court, and upload steno notes and transcripts to specific platforms within specified time frames.3 The question will ultimately become, then, are the controls placed on court reporters by courts sufficient to cause courts to fail to meet Part A of the ABC Test. Nonetheless, one would expect that as long as some business, like a court-reporting firm retained by a court, has classified its court reporters as employees, the entity which retains the services of the court reporter will not likely come under too much scrutiny. 4 There are, of course, no guarantees.

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1 According to the Wage and Hour Division of the United States Department of Labor, court reporters generally do not qualify as exempt employees under the Fair Labor Standards Act. (FLSA2007-2NA, August 23, 2007.) Given the similarities in the exemptions, it is likely that the same determination would be reached under California law.


2 Notably, there is an FLSA exemption which provides that time spent preparing transcripts for courts is not considered hours worked, and is not to be included in calculating the employee’s regular rate of pay for purposes of the overtime calculation. (29 U.S.C. § 207(o)(6) (providing a narrow exemption from the definition of “hours worked” for certain activities of court reporters working for public agencies).) In other words, court reporters working for courts as employees are not entitled to separate hourly compensation for time spent preparing transcripts. This exemption does not apply when court reporters are employees of private entities. This begs the question then of whether, if courts retain the services of freelance court reporters through court-reporting firms, employees of the court-reporting firms working in the courts will be subject to this exemption.

3 Cal-PERS issued a determination letter on September 17, 2014, concluding that, because of the legal right a court has to exercise control over court reporters and the fact that the services are an integral aspect of the court’s business, the Placer County Superior Court could not retain court reporters in excess of 940 hours per year without paying in to the Cal-PERS retirement system on behalf of the reporters, regardless of whether the court reporter was retained through a third party court-reporting firm.

4 Of course, even if a hiring entity is not found to be in violation of the independent contractor vs. employee distinction, the entity could still be held to be a joint employer of the worker depending upon the degree of control the entity exercises over the workers of the entity with which it contracts. However, the question of joint employment is a distinct legal analysis which is beyond the scope of this article.

Freelance Court Reporters and Court-Reporting Firms

For individual court reporters who have long operated as independent contractors offering their services to multiple court-reporting firms or individual clients, the issue is likely to become one of whether a court-reporting firm will continue to provide the court reporter with assignments on an independent contractor basis, or will that court-reporting firm move to an employee business model. With regard to CART and captioning services, the question will again likely come down to the type of entity for whom the reporter is providing such services, and how that entity’s “usual business” is defined.

Unfortunately for court-reporting firms, the plaintiffs’ bar is already circling, which means that these entities will have to take a good, hard look at their business models and how they want to operate going forward. As noted previously, one open question from the Dynamex decision is – how will courts treat court reporters who are separately incorporated, have their own websites and advertisements, and who work for multiple different clients and court-reporting firms? Will it be enough for court-reporting firms to contract only with other entities, or will courts look past that corporate structure and find that the individual court reporter is still actually an employee of the court-reporting firm? Under such a corporate structure model, a court reporter would be paying himself/herself as an employee, thereby avoiding the arguments that accompany wage and hour lawsuits (i.e. did the reporter receive minimum wage, overtime, meal and rest periods, etc.). This has the potential to, at a minimum, minimize the potential damages at stake. In other words, if the court reporter has already been properly paid as an employee by one entity, there would be no basis upon which to sue the court-reporting firm for wage and hour violations.5 While this remains an open question, this distinction is not one that is likely to stop plaintiff-side class action firms from pursuing litigation.

At the same time, many court-reporting firms do not view their “usual business” as providing court-reporting services. Rather, they define themselves as an agency, which connects independent court reporters with clients, and then provides those court reporters with administrative services such as scheduling, fee handling, transcript storage and handling, etc. The relationship is, in their minds and in the minds of many of the reporters who work with them, a symbiotic one. The question will ultimately be, is there room in the traditional employer-independent contractor dichotomy for a third option – a business relationship wherein two sophisticated parties agree to provide services for one another in a mutually beneficial manner? Court-reporting firms are encouraged to consult with legal counsel to undertake a thorough analysis of their business model, as well as their independent contractor agreements, to determine whether and how they should restructure. Moreover, since class action litigation is the vehicle most often utilized for resolving these issues, court-reporting firms should consult with legal counsel regarding the pros and cons of utilizing arbitration agreements with class action waivers.

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5 Again, this will not insulate a court-reporting firm from a finding that it is a joint employer with the court reporter’s corporate entity, which can impact liability under a number of different employment laws for both the court reporter’s entity and the court-reporting firm (e.g. counting the number of employees of the court-reporting firm for purposes of compliance with the California Family Rights Act).

 
Legal Disclaimer: The information in this article (i) is provided for general informational purposes only, (ii) is not provided in the course of and does not create an attorney-client relationship; (iii) is not intended as a solicitation, (iv) is not intended to convey or constitute legal advice, and (v) is not a substitute for obtaining legal advice from a qualified attorney. You should not act upon any of the information in this article without first seeking qualified professional counsel on your specific matter.

Kimberly A. Lucia is a shareholder at the law firm of Boutin Jones Inc. in Sacramento. Kimberly counsels clients in all areas of employment law, including drafting employee handbooks and policies, negotiating severance agreements, and conducting employment investigations. She routinely provides advice and counseling to public and private employers on wage and hour issues, discipline and termination, disability accommodations, and Family and Medical Leave Act/California Family Rights Act leaves of absences. Kimberly has also represented clients in federal and state court in wrongful termination in violation of public policy, wage and hour class action, discrimination and harassment lawsuits.