Due to concerns about worker exploitation, the legal trend in California and in many other jurisdictions in the United States has been to make it more difficult for companies to legally classify service providers as independent contractors rather than employees.
A landmark 2018 decision by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (“Dynamex”) catalyzed this trend in California.
Specifically, in the Dynamex case, the California Supreme Court changed the legal test California would use to determine whether a service provider is an employee or independent contractor for certain purposes, effectively making it harder for a company in California to legally classify service providers as independent contractors.
In Dynamex, the California Supreme Court adopted the “ABC Test” which was already in use in a number of other states. A California worker will be considered an employee under California’s wage orders regulations – which govern minimum wages, overtime, show-up time, reporting time requirements, meal breaks, rest breaks and other working conditions – unless the putative employer proves under the ABC Test all of the following, thereby rebutting the presumption that a worker is an employee:
(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.
Not only do hiring entities have to take into account Dynamex and the ABC Test on a going-forward basis after the California Supreme Court’s 2018 decision, but, as a result of another court decision made by the Ninth Circuit Court of Appeals in Vazquez v. Jan-Pro Franchising Int’l, No. 17-16096 (9th Cir. May 2, 2019), the decision in Dynamex was made retroactive, placing businesses at risk of liabilities stemming back several years for workers now classified under the ABC Test as employees. In other words, the California Supreme Court’s Dynamex holding and the now-infamous “ABC Test” retroactively apply to the classification of employees and independent contractors by employers under the prior law before the California Supreme Court decided the Dynamex case.
The importance of the proper legal classification of workers as employees or independent contractors is not new. For years, many crucial legal determinations have relied on the distinction.
Merely as examples, employees and independent contractors are treated differently under state and federal tax law. Also, for instance, a myriad of different labor and employment law regulations apply to employees, but not to independent contractors.
No single test exists for distinguishing an employee from an independent contractor. Instead, different tests exist for different purposes. For instance, the Internal Revenue service utilizes a different test than the State of California. It is even more complicated: the State of California has used different tests in analyzing the employee versus independent contractor distinction in different legal areas, and different states often use different tests. Even if various jurisdictions use the same test for a particular purpose, often they interpret and apply the test differently. In one context or jurisdiction a worker might be correctly classified as an “independent contractor”, but in a different context or jurisdiction, depending on the type of claim being made, that same worker might be properly classified as an “employee.”
Failure of a company to properly classify service providers as employees and independent contractors can result in very significant penalties, including fees, interest, and back-penalties for past misclassification of workers.
In determining proper worker classification, traditionally, courts and regulatory bodies focused on the factor of “control” – the more that a hiring entity or person exercises control over a worker and the work being performed, then the more likely the worker would be deemed an employee. The Internal Revenue Service purports to use this traditional, “common law” control approach but also has emphasized a litany of factors that assess such control, grouping those factors into three categories; behavioral control, financial control, and the relationship.
For Fair Labor Standards Act (FLSA) claims, another test is used: the so-called “economic realities” test. In California, for workers compensation and tort claims, the Borello test – named after an important judicial decision – was used, while for California wage order claims, Courts now looks to the “ABC Test”, a different test of employee versus independent contractor classification widely used in many states.
Most of these commonly used tests of worker classification, being fact-based, have been plagued by unpredictable outcomes, making it hard for hiring entities to be comfortable in classifying workers as independent contractors and not risk being second-guessed by courts and regulatory bodies.
Changes in recent years in how worker classification is determined by courts and regulatory bodies have placed a significant burden on employers to keep up with these shifting changes in the law. Litigation regarding “gig economy” workers and whether they are independent contractors or employees has garnered nationwide press coverage, but other shifts in interpretation have been less publicized.
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