Bradley Arant Boult Cummings LLP

We’ve posted on this topic several times before but the battle between independent contractors and employees continues.

Here’s a brief refresher on the basics of why proper classification of employees as independent contractors or employees matters:

  • Employees (not independent contractors) are entitled to workers’ compensation and unemployment benefits.
  • Employees (not independent contractors) have taxes withheld on payroll. Independent contractors are subject to self-employment taxes.
  • Federal and state employment discrimination laws cover employees, not independent contractors.
  • A company’s potential liability can depend on the individual’s status as an employee or independent contractor.

However, the legal landscape on how to classify a worker as an employee or independent contractor keeps changing, especially state-by-state.

Just last month, the California state Assembly passed legislation that changes the landscape for workers in California and labels workers who perform services for hire (also known as “gig” workers) as employees (not independent contractors) by default. The new bill is the result of a 2018 California Supreme Court decision, Dynamex v. Superior Court, in which the court held that to classify a worker as an independent contractor, a company must show three things (now referred to as the “ABC” test): (a) the company does not directly control the worker, (b) the work falls outside the company’s usual course of business, and (c) the worker is customarily engaged in an independently established trade. And in May 2019, the Ninth Circuit, in Vazquez v. Jan-Pro Franchising International, Inc., held that Dynamex applies retroactively—i.e. to cases before the Dynamex decision was issued.

But recent guidance from the Department of Labor’s Wage and Hour Division (WHD) and the National Labor Relations Board (NLRB) indicates a shift of classifying similar “gig” workers as independent contractors, not employees like the California bill proposes. The WHD issued an opinion on April 29, 2019, refining the definition of independent contractor and focusing on the so-called “economic reality test,” which considers the degree of economic dependence the worker has on his or her employer. The WHD described it as “the touchstone of employee versus independent contractor status.” And just a few weeks later the NLRB issued an advice memorandum classifying a group of Uber drivers as independent contractors under the National Labor Relations Act, finding that Uber drivers have “significant opportunities for economic gain and, ultimately, entrepreneurial independence.”

So, what does all this mean? Employers should keep a careful watch on developments in this area of the law and particularly in the state(s) in which they do business. There is no one-size-fits-all approach to determining whether an individual is an employee or independent contractor, and the laws keep changing.

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