If you are a business owner in California that relies heavily on independent contractors, you must become familiar with the Dynamex decision issued by the California Supreme Court on April 30, 2018. It indeed “changes the game” about the proper classification of workers as independent contractors.
This not only affects the “gig economy,” but also affects industries with a long history of independent contractor use, such as:
- Real estate agents
- Insurance agents
- Hair stylists & beauticians
- Massage therapists
- Truck drivers
- Personal trainers
- Sports coaches
- Gentlemen’s Club entertainers
- Start-up companies who use contractors in their early stage
This “may upend the existing independent contractor labor market,” says labor & employment attorney Timothy Kim in his discussion of the ramifications of this decision. [Click Here]
This decision changes the landscape in two important ways:
- It makes the presumption that workers are employees, not independent contractors
- It puts the burden on the hiring entity to establish independent contractor status
To meet the burden, each worker must pass the “ABC test.”
- The worker must be free from the control and direction of the hiring entity; and
- The worker must perform work that is outside the scope of the hiring entity’s usual business services; and
- The worker must be engaged in an independently established trade
Note that each of these three must be met to establish an independent contractor relationship. Items A and C are not new and have been a part of the criteria to establish independent contractor status in the past.
What is new, and crushing to the gig economy, is item B. When the work is a part of the core services that an entity provides (think Uber drivers), those workers are now employees and not independent contractors.
There is a layer of complication here, as the decision is meant to only apply under California Labor Code rules and regulations. For example, the ABC test does not apply to the determination of independent contractor status in Workers’ Compensation.
The establishment of employee vs. independent contractor has been a bone of contention for decades. Businesses can deal with workers as independent contractors at a much lower level of administrative burden and cost.
Those working as independent contractors like the flexibility and freedom of working and earning on their schedule and time, fitting work into their lives instead of fitting their lives into their work demands.
Government agencies, on the other hand, are more anxious for workers to be classified as employees because they gain more tax revenue. According to the California Department of Industrial Relations, the misclassification of workers as independent contractors costs California an estimated $7 billion per year of payroll tax revenue.
In May, the US Court of Appeals for the Ninth Circuit ruled that workers who think they may have been misclassified as independent contractors and should, therefore, have been employees can file retroactive legal claims against their companies, going back four years for such things as unpaid overtime.
On the legislative front, the ride-hailing companies Uber and Lyft are currently fighting against the passage of AB5, which would codify the Dynamex decision; a legislative fix to overturn the Dynamex decision is not anywhere near the legislative finish line.
So what now?
Employment Practices Liability Insurance, EPLI, should be considered; though it will not cover you for fines and penalties for the misclassification of workers, some EPLI policies provide a small limit of coverage, typically $100,000, to pay your defense costs in any Wage & Hour actions brought against you.
If you think you may be vulnerable to the ABC test, discuss it with your attorney. According to employment practice attorney Dan Pyne of Hopkins and Carley, the strategy for how to deal with workers who are now classified as independent contractors is based on discussions which you would like to have protected under attorney-client privilege. Click Here.
In summary, the proper classification of independent contractors as such has become much more difficult in California. The ramifications for Labor Code violations could be substantial for misclassified workers, in some cases inviting class actions suits.
Our advice: seek professional help—attorneys fees can be vexing at times, but the alternative costs of unguided actions can be substantially greater.