Independent Contractor Test Changes
California’s legal decisions can be far-reaching and progressive. The recent Dynamex Decision is altering the independent contractor test. Independent contractors are a common source of skilled labor for organizations, and freelancing has boomed with improvements in communication and technology.
In the recent potentially far reaching California Supreme Court “Dynamex Decision”, a new set of criteria apply. The “ABC” test has been adopted for determining independent contractor relationships going forward. This change is effective now, and it is yet to be seen if the test can be applied retroactively.
The new test begins with the “presumption that the worker is an employee”. The employer/hiring party must establish that the worker is an “independent contractor”.
Second, in order to establish that the worker is an independent contractor, the hiring party must establish that ALL of the three parts involved in the “ABC” test apply.
The court saw the issues in potential misclassification of workers as independent contractors rather than employees as a very serious problem. The loss to governments of federal and state dollars is a hot issue. Workers that are classed as independent contractors do not receive labor law protections, Family Leave Medical Act, or state disability insurance. The employer is responsible for paying missed payroll taxes including the employee’s portion. This creates significant exposure even if the contractor is reporting his income correctly.
We strongly urge you to immediately review your independent contractor relationships and assess your business risk and potential for litigation in context of this recent Court decision. We are available to assist in reviewing your independent contractor relationships and keeping your business in compliance.
Trouble is not always started from a worker complaint. Litigation can be initiated from tax audits, industrial accidents, anonymous tips, audits of customers and vendors, and industry wide saturation enforcement.
There are many impacts of this ruling on employers. Benefits, taxes, insurance, employment protections, may need to be addressed. The costs of adding employees to your organization’s payroll will require a complete review of your pricing, staffing needs, and determining how to absorb the cost.
Again, we want to emphasize that the Court’s decision is expected to have a very significant impact for many employers representing serious challenges that need to be addressed now.
The Borello Tests – “Apparently no longer govern”
- Right to control details of the work
- The right to discharge at will, without cause
- The party performing services is in a distinct occupation or business
- The skill required to perform the services
- The party providing the tools, place of work
- Length of time to perform the services
- Method of payment
- The type of relationship both parties believe they were creating
CALIFORNIA Supreme Court TURNS INDEPENDENT CONTRACTOR LAW ON ITS HEAD – MAKING IT AS EASY AS “ABC”
In Dynamex Operations v. Superior Court, the California Supreme Court made a significant change in independent contractor law, adopting an “ABC” test for determining whether an individual is an employee under the Wage Orders.
Although other states use the ABC test, its wording varies from jurisdiction to jurisdiction. Here, the Court adopted a version that tracks Massachusetts’ ABC test. The net effect is that it makes it significantly more difficult for California employers to show workers qualify as independent contractors. Employers should now re-assess their workers’ classification and decide whether they should reclassify their workers as employees.
In Dynamex, the Court held that, for purposes of California Wage Order claims the definition of “employment” identified in California’s Wage Orders governs. It articulated a new standard for what it means for an employer to “suffer or permit” an individual “to work.” The new test presumes that any worker hired to perform services is an employee of the hiring business. Under the new standard, the burden is on the employer disputing employee status to prove all of the following elements (referred to as the “ABC” test):
(A) the worker is free from the control and direction of the hirer in connection with performing the work, both under contract and in fact. As the Court explained, a business does not need to control the “precise manner or details of the work” in order to be found to have maintained “control and direction”,
(B) the worker performs work outside the usual course of the hiring entity’s business. For example, a plumber providing plumbing services to a bakery is outside the usual course of the bakery’s business: but a cake decorator hired to decorate the bakery’s cakes is not outside the usual course of business, and
(C) the worker customarily engages in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity. This element focuses on whether the worker “independently made the decision to go into business for himself or herself.”
Unlike in the past, where the courts balanced multiple factors to assess contractor status, under Dynamex. the hiring entity’s failure to prove any one of the three prerequisites will be sufficient in itself to establish that the worker is an employee.
The Supreme Court justified its decision largely on policy grounds, stating that the ABC test was more fair to workers who wanted the “fundamental protections” of California’s Wage Orders. The Court said that using a less employee-friendly standard could create a “race to the bottom” where businesses implement substandard wages and unhealthy conditions by trying to avoid the protections of the Wage Orders.
The Supreme Court also noted that the phrase “suffer or permit” could not be interpreted literally such that it would include workers such as plumbers or electricians, who have traditionally been viewed as “genuine” independent contractors who work in their own independent business.
What Dynamex Means for Employers
Dynamex creates a presumption of an employee-employer relationship that must be disproven by the
employer. Employers who classify any of their workers as independent contractors should review the relationship utilizing the ABC test to determine whether the worker has been properly classified. For “gig economy” employers, such as Uber and Lyft, who classify most of their workers as independent contractors, the Dynamex decision could have far-reaching implications.
Dynamex ushers in new challenges to independent contractor classifications, and will most likely generate class or PAGA actions, with significant exposure for damages and penalties. Notably, independent contractors do not sign class arbitration waivers, meaning that even those employers who have protected themselves from class actions through these waivers may be left unprotected. Notwithstanding, Dynamex did not prohibit independent contractor relationships and, under the right circumstances, independent contractor business models can continue to survive in California.
^ The Wage Orders specifically exempt, inter alia, employees directly employed by the state or any political subdivision except as provided in Sections 1, 2, 4,10, and 20 thereof. If a public agency decides to reclassify independent contractors as employees, consideration should be given as to how these workers might be treated by CalPERS (or a ’37 Act retirement system). The change could be treated as fully retroactive for retirement plan purposes, with employer and employee contributions due from both. Public agencies should consult with counsel before reclassifying their independent contractors as employees.
^ Dynamex only addresses California law under the Wage Orders. It does not impact the federal standard for addressing whether a worker is an independent contractor or employee.
^ A “Wage Order Claim” involves those issues governed by the applicable Wage Orders, such as minimum wage and overtime claims. Notably, the Court limited its holding to apply only to claims alleging violations of California’s Wage Orders and did not decide whether the ABC test would apply to claims alleging violations of the California Labor Code (e.g. an expense reimbursement claim), or whether a different test would apply. However, employers should keep in mind that most California lawsuits alleging independent contractor misclassification will predominantly allege violations of the applicable wage order.