It has been more than a year since the California Supreme Court issued its landmark decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, setting forth a new test for determining whether a worker is properly classified as an independent contractor for wage order claims. As many commentators explained, the court significantly changed the legal landscape for California businesses by rejecting 30 years of precedent that not only interpreted independent contractor status, but that also offered guidance to businesses on how to properly classify workers.
Under Dynamex’s new “ABC” test, a worker is presumed to be an employee (as opposed to an independent contractor) unless the hiring entity can overcome the presumption by proving each of the following requirements:
- (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 for the hiring entity.
The decision has had a massive impact on California workers, existing California businesses, and future businesses and entrepreneurs considering doing business in the state. It is no surprise that the decision sparked emergency lobbying and pushes for competing legislation to overturn or codify the decision. On one hand, many companies across a variety of industries (including technology companies, salons, marketing firms, and photographers) and the California Chamber of Commerce have lobbied the legislature to suspend or limit the Dynamex holding. They argue the Dynamex decision jeopardizes workers’ freedom of choice and pushes them into a traditional employment model that may lack flexibility. In addition, while large, established brick-and-mortar businesses may be well-equipped to adapt to avoid misclassification issues, some smaller organizations and new non-traditional businesses, many in the technology, innovation and gig economy industries, have relied on the use of independent contractors to help minimize costs.
On the other hand, the labor community is taking the opposite view, arguing the ABC test under the Dynamex decision should be codified and applied more broadly beyond solely with respect to wage order claims. The labor community argues the ABC test affords protections to workers to which they are otherwise not entitled if classified as independent contractors and further argues that any decision to undermine Dynamex would be harmful to workers.
Currently before the legislature are competing bills: AB 5, AB 71, and SB 231. AB 5, introduced by Assemblywoman Lorena Gonzalez, D-San Diego, seeks to codify the ABC test, exempting only certain occupations, such as doctors, investment advisers and direct sales salespeople. However, other professionals who similarly control their own hours, projects and rate of pay (such as barbers, court reporters, therapists, and real estate agents) are currently not included in the proposed exemptions. The California Chamber of Commerce recently announced it would support AB 5 if the bill is amended to exempt more professionals “who all control when they work and for whom they work.”
AB 71, introduced by Assemblywoman Melissa Melendez, R-Lake Elsinore, would provide a legislative mandate to restore the prior Borello standard, a common law multi-factor test which considered, among other factors, the worker’s skill, the nature of the business and the length of time for which the services were to be performed, instead of using the ABC test.
SB 238, introduced by Senator Shannon Grove, R-Central Valley, calls for using the federal Fair Labor Standards Act test to determine employment status, focusing on the “economic realities” surrounding the working relationship, as opposed to the ABC test.
While the debate about the Dynamex decision and its merits continues, and its future remains unknown, it is clear that California businesses are having to adapt to the Dynamex decision by re-evaluating their policies and procedures for contracting for services that were previously outsourced to independent contractors. Among other things, businesses have been forced to audit their workforce and consultants and revisit the agreements under which independent contractors were retained.
Businesses are required to scrutinize the independent contractor relationship on a case-by-case basis both with respect to the agreement in place and the facts of the relationship. A business needs to ensure there is a written independent contract agreement in place and should make sure that it clearly provides the worker is free from the company’s control and direction, the work being performed is outside the usual course of the company’s business (preferably with an explanation as to how it is outside the usual course of the company’s business), and the worker is free to and is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the company. In addition, the business is required to ensure that the worker is actually free from the company’s control and direction while the work is performed, does actually perform work outside the usual course of its business, and is engaged in an independently established trade, occupation, or business of the same nature and not just free to do so. The business carries the burden of proving the foregoing is true.
For a worker who cannot pass the ABC test, companies have considered converting them to part-time employees to try to minimize potential overtime and break requirements. For example, requiring the worker to work three and a half hour shifts or less to try to avoid entitlement to meal breaks, paid rest breaks, and overtime. In addition, businesses have analyzed whether the worker may be classified as exempt if the worker was an employee, including being paid an annual rate of a sufficient level. If so, the worker may not be subject to all of the wage order protections and thus, the worker could still potentially qualify as an independent contractor for all other purposes under the Borello test.
Other businesses have also taken additional precautionary measures, rolling out arbitration agreements with class action waivers in the event litigation were to arise to try to require such misclassification claims to be heard on an individual basis.
Misclassification of a worker as an independent contractor carries many risks and potential liabilities for California businesses, including wage and hour liability (such as for claims for overtime, meal and rest break premiums, wage statement violations, and waiting time penalties), Employment Development Department (EDD) fines and assessments, IRS fines and assessments, I-9 violations, penalties for violation of state workers’ compensation insurance laws and liability for unpaid premiums, entitlement of misclassified workers to coverage under the company’s employee benefit plans, and penalties for willful misclassification.
California businesses should seek advice of legal counsel to evaluate current independent contractor relationships as well as prior to engaging future independent contractors.