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The California Supreme Court ruled, on April 30, that a tougher legal standard must be used to classify a worker as an independent contractor instead of an employee. This is a major development in California employment law, which will cause many workers who are now classified as independent contractors to be considered employees in the eyes of the state, according to an analysis by Shegerian & Associates, an employment discrimination law firm based in Los Angeles.

In its ruling, Dynamex Operations West, Inc. v. Superior Court, the California Supreme Court found that Dynamex, a courier and delivery service, had misclassified its couriers as independent contractors in order to cut costs.

Worker misclassification has become a significant labor issue in the United States in recent years, with millions of employees being reclassified as independent contractors, and millions of employment-based full-time jobs being replaced with contract, freelance, part-time, or temporary positions. The number of these alternative work relationships increased by over 50 percent from 2005 to 2015, and accounted for 94 percent of net job growth during that time.

The Court held that it is the burden of the hiring entity to establish that a worker is an independent contractor. To meet this burden, the employer must establish each of the following three factors, commonly known as the ABC test:

(A) The worker is free from the control and direction the hiring entity typically exercises over its employees.

(B) The worker performs work outside the scope of the hiring entity’s business.

(C) The worker is customarily engaged in an independently established trade, occupation, or business, taking such steps as incorporating their  business, getting a business or trade
license or advertising. A hiring entity does not satisfy part C of the test simply by showing that it does not prohibit or prevent a worker from engaging in such an independent
business.

Dan Eaton, who is an attorney with  Seltzer Caplan McMahon Vitek and an employment law instructor at San Diego State University says, “The California Supreme Court’s new ABC test is not as easy to satisfy as the name suggests. The bottom line is that wage regulators and courts will presume that a worker is an employee – with the right to overtime and breaks – unless the hirer proves each of the three ways the worker qualifies as an independent contractor.  Wrongly designating an employee as an independent contractor could expose a business to substantial claims for unpaid wage and penalties. A hiring entity (in English, a business) should review its existing independent contractor relationships to make sure they satisfy each part of the ABC test.  Any relationship that doesn’t meet each part of the test – or that is too close for comfort — should be re-designated as an employment relationship and the compensation arrangement should be adjusted accordingly. Simply having a worker sign a document agreeing that there is an independent contractor relationship is neither necessary nor sufficient. Authorities will look well beyond such self-serving labels. If it looks like a duck, hunting officials treat it like a duck. And if the reality of the relationship looks like the worker is an employee, that is the way the law will treat the worker.”

FIVE PRECAUTIONS FOR EMPLOYERS

The firm of Lantham & Watkins gives these precautions for California employers:

1. The burden to establish that a worker is an independent contractor, and not an employee, is on the employer.

2. Avoid engaging a person as an independent contractor to carry out a core business function or to perform services that are the same as those performed by employees.

3. If engaging a person as an independent contractor:

  • Document the relationship with the worker as an independent contractor.
  • Make certain that the worker actually controls the means and method of achieving the employer’s objective. Specify the outcome desired and set deadlines for major milestones and completion. Avoid or minimize specifying the method, hours, and details of the work process.
  • Determine if the worker has a real business independent of providing services to the employer. Avoid indefinite or long-term exclusive arrangements. Determine if the worker actually markets his/her services to others.

4. Evaluate the employer’s obligation with respect to workers compensation benefits, unemployment insurance taxes, and payroll taxes and withholdings, as the test to determine employment status may differ from that applicable to California’s Wage Orders.

5. When in doubt, consult with counsel or satisfy the minimum wage and hour laws.

The firm provides additional information on what employers should know about the Supreme Court’s ruling about contractors.

Contact your LISI Regional Sales Manager to find out more.