Hiring Independent Contractors: The Story Continues
Last April in the California Supreme Court’s Dynamex decision a new standard, the ABC test, was adopted for classifying individuals as independent contractors. Now, a year after that landmark ruling, the CA legislature will weigh in on this significant employment issue. This ruling has already opened the door to liability and litigation for employers, limited opportunities for independent contractors and has the potential to disrupt entire industries and the gig economy. Read on to learn what’s at stake for employers, workers and even consumers.
For the 2019 CA legislative session, 4 specific bills were introduced dealing with Dynamex. Many see this as an opportunity for the legislature to intervene and give consideration to the modern economy and advancements in technology in a way that the court decision, limited to the facts of the case and labor laws that have been in place for decades, could not.
In the absence of a compromise between labor and the business community, the implications of Dynamex are profound. The ability for individuals to freelance and work as independent contractors is less flexible and more restrictive; this is in opposition to today’s workforce that wants flexibility and opportunities to earn income outside of traditional activities, i.e. the gig economy. It is much more difficult for businesses to utilize the services of independent contractors, and risks of misclassification include lawsuits, back taxes, wage payment liability, penalties and fines. There is also the potential to disrupt on demand service companies (think Uber, DoorDash, Instacart, Task Rabbit, etc.) and the services and prices available to consumers if these businesses can no longer operate with the same business model.
As we wait and see how this plays out in the 2019 legislative session, it is advisable that CA employers take steps now to audit their worker base and current independent contractor relationships as well as ensure proper contractual agreements are in place. The HR Manager consultants are available to assist you with your compliance efforts.
And if you somehow missed this employment news headliner last year, continue reading for a summary of the Dynamex decision:
What happened? On April 30, 2018, the California Supreme Court essentially dismissed the long held standard, Borello 48 Cal 3d 341 (1989), for classifying workers as independent contractors. In its landmark ruling on Dynamex Operations West, Inc. v. Superior Court of Los Angeles, the court adopted the new ABC test to determine if a worker meets the definition of “employed” for wage order purposes. The wage order defines minimum wage, overtime, meal and rest breaks, and exempt status.
Why employers should be concerned: the proper classification of a worker as an employee or independent contractor dictates a multitude of employee rights and entitlements including union representation, benefits, wage and hour standards, ACA, employment tax, worker’s compensation and more. State and federal agencies routinely audit for independent contractor misclassifications. An independent contractor who believes they are entitled to employee “benefits” may file a complaint with the DOL (Department of Labor). More often than not, if an independent contractor files for unemployment benefits or submits a worker’s compensation claim this may trigger a DOL audit. In addition to penalties and back payments for wages, taxes, etc., employers face heavy fines if found to have “willfully” misclassified an individual as an independent contractor.
What is the ABC test? All three factors of the ABC test must be met in order to establish a worker as an independent contractor under the wage order:
The ABC Test
(A) 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) the worker performs work that is outside the usual course of the hiring entity’s business; and
(C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
The HR Manager consultants are available to assist you with your efforts in addressing this complex issue. Should you need any assistance, please feel free to reach out.