Can you be an independent contractor today in California? On April 30, 2019, the California Supreme Court issued a ruling in Dynamex Operations West, Inc. v. Superior Court of Los Angeles that changed the landscape for hiring consults in the state. Hailed as a hero by labor groups, and a boogeyman to businesses and consultants alike, the case has been cheered, feared, and everything in between for almost one year now. Both groups are correct in some ways and wrong in others.
In its capacious, 82-page decision, the California Supreme Court rejected the previous test that the court used to determine whether a worker has been properly classified as an independent contractor for the purposes of the California’s Industrial Welfare Commission (“IWC”)’s wage orders in favor of a stricter standard used in states such as New Jersey and Massachusetts. Particularly, the Court embraced a standard presuming that all workers are employees instead of contractors and placed the burden on any entity classifying an individual as an independent contractor of establishing that such classification is proper under the newly adopted “ABC test.”
The ABC Test
Under the ABC test, a worker will be deemed an employee for wage order purposes unless the hiring entity proves:
- (A) that 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;
- (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and
- (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
Most businesses have no problem meeting elements (A) and (C) as these elements have always been part of the analysis as to whether they can hire or be a consultant rather than an employee. It is element (B) that has caused wide spread panic. Essentially, the Court is saying that if a worker performs duties that further the usual course of the hiring entity’s business, they can not work as consultants.
For instance, a hairdresser in a hair salon will sometimes lease the space from the salon and the hairdresser sets their own schedule and markets for their own clients. This type of arrangement may be prohibited under these standards because the hairdresser performs work that is within the scope of the usual course of the hiring entity’s business, selling and performing hair dressing services.
However, the same hair salon would still be free to employ a plumbing service to come and fix a plumbing issue in the salon. Fixing a broken pipe would not be something that would be expected in the usual course of business of the salon.
If we explore the example even further, janitorial services should be concerned. Many businesses outsource this need to a company who either employs its own staff or the company is just the janitor alone. Is performing a necessary, regular service considered something that would be within the usual course of a hair salon’s business? Who knows? On the one hand, the purpose of the salon is to provide hair dressing services, not janitorial. However, janitorial services are necessary in order to keep the salon’s licensing and to keep the salon clean for customers. Additionally, the services are performed regularly. Thus, its possible that a business employing a single janitor, even one who markets themselves as an independent business and has multiple clients, might be considered an employee under these standards.
- Taxi Cab Companies: On October 22, 2018, a cab driver sued a cab company with whom he worked as an independent contractor with for misclassification of his position. The California Court of Appeal, in Garcia v. Border Transportation Group, ruled that the Dynamex test applied exclusively to claims that fell under the California Wage Order, while leaving other employment claims for evaluation under the Borello While relieving some categories of workers, this leaves a lot of employers and workers confused as to what rights each has available.
- Ride Sharing Apps: It has been widely speculated that the decision was meant to attack ride sharing apps that have independent drivers. However, the analysis will as usual come down to whether the usual course of the business of these apps is to run the app or as a transportation company.
- Janitorial Services
- Real Estate: Real estate agents may be vulnerable, although much of their work is likely exempt from the wage orders due to the sales exemption.
- Medical Groups and Hospitals: Doctors are often independent contractors. However, like real estate agents, they are exempt from the wage orders.
- Event services groups
- HR Consulting Firms
- Transportation Industries
What Happens if I Misclassify a Worker as an Independent Contractor?
If a Court should rule that a business misclassified a worker as a contractor, the employer could be liable for:
- Wage Law Violations: Employers will be held liable for failure to wages, including criminal liability in some instances. Employers found in violation may incur massive penalties for unpaid overtime costs and attorney’s fees.
- Tax Consequences: Penalties may be levied for failing to withhold state and federal payroll taxes, including failure to make matching social security and Medicare payments.
- I-9 Violations: Employers who fail to properly complete I-9 verifications have been penalized by the DOL.
- Unemployment Insurance and Worker’s Compensation Fund Penalties: Companies who fail to contribute to the state unemployment or worker’s compensation insurance pool, may be assessed penalties.
- Employee Benefits: Misclassified independent contractors are entitled to coverage under the company’s employee benefit plans and reimbursement for expenses the worker incurred while they should have been classified as an employee.
So, where do we go from here. There is good news for companies employing contractors and workers who desire an independent contractor relationship:
- Analyze whether the worker is subject to the wage orders. Because the Dynamex test applies exclusively to the wage orders, workers who are exempt from overtime wages, minimum wages, reporting time pay, unpaid expenses, and meal and rest break protections are not covered under the Dynamex decision.
- Transportation businesses may have a unique exemption under the FAAAA. Businesses engaged in the transportation industry may have a unique exemption under the Federal Aviation Administration Authorization Act of 1994 (FAAAA). The FAAA contains provisions that would conflict with prong “B” of the Dynamex In those instances, the federal law should outweigh state law.
- Ensure the business does not exercise control over the worker.
- Review mission and purpose of the business. Companies should take care to define their business and how it relates (or better, does not relate) to the services being performed. Carefully review the kinds of public statements made in marketing material and websites that describe the business and refine them as appropriate.
- Require Contractors to maintain their own business. Independent Contractor agreements should include the expectation that the Contractor is not required to be at the business on a set schedule and that they are free to work for others and to market to their own clients. Before working for an independent contractor, require documentation from the worker, such as a business license, business card, advertising, and/or references. A business should contract only with legal entities, if possible.
- If a contractor would otherwise qualify under the Wage Orders, it is strongly recommended that you follow the most restrictive test for independent contractor status. Failure to do so could result in you fighting two lawsuits, not just one. One for wages and one for any other claims the individual maintains against the company.