How do I apply an AngularJS directive based on a class set by ng-class?

ng-class just sets classes on the DOM, after the compilation process.

Perhaps a better way to apply the directive would be through an HTML attribute:

<div test-case>

Of course, this is not conditional, but I would leave the conditioning to the directive:

<div ng-app="example" ng-controller="exampleCtrl">
    <div test-case condition="dynamicCondition">Hello</div>
    <input type="checkbox" ng-model="dynamicCondition"/> Condition 
</div>

and

angular.module('example', [])
    .controller('exampleCtrl', function ($scope) {
        $scope.dynamicCondition = false;
    })
    .directive('testCase', function () {
    return {
        restrict: 'A',
        scope: {
            'condition': '='
        },
        link: function (scope, element, attrs) {
            scope.$watch('condition', function(condition){
                if(condition){
                    element.css('color', 'red');
                }
                else{
                    element.css('color', 'black');
                };
            });
        }
    }
});

Notice the directive name is testCaserather than testcase, the scope: {'condition': '='}, bit ensures that the condition attribute is synchronized and available as scope.condition and the watch evaluates the second argument every time the expression on the first changes value. JsFiddle over here.

Perhaps you should also look into ng-switch:

<div ng-switch="conditionFunction()">
  <div ng-when="true" test-case>Contents when conditionFunction() returns true</div>
  <div ng-when="false">Contents when conditionFunction() returns false</div>
</div>