Is This The End Of Independent Contractors?

Is This The End Of Independent Contractors?

The California Supreme Court recently handed down a decision that has significant impact on California employers, and that will likely be the catalyst for additional legislative changes and legal battles. On April 30, 2018, in Dynamex Operations West v. Superior Court of Los Angeles (2018) 4 Cal.5th 903 (“Dynamex”) the California Supreme Court established a new test for who is considered an independent contractor for lawsuits brought under wage orders. The Court established a 3-part test which differs dramatically from previous court decisions that have historically shaped our understanding of an independent contractor. And as important as the decision is, it is equally important to understand what definition of independent contractor remains intact. Dynamex will not be the last word on independent contractors. Until the courts define the contours and reach of Dynamex, businesses, and their legal counsel will wrestle with the decision. Independent contractors can, and will continue to, play an important role in our economy.  With Dynamex, however, expect a curtailment of workers characterized as independent contractors.

**UPDATE September 12, 2019 A.B. 5 Worker Status: Employees and Independent Contractors**

In our original blog post dated May 25, 2018, we wrote about the Dynamex case holding of April, 2018 and its effect on independent contractors. Yesterday, September 11, 2019, the California legislature passed AB – 5 to regulate the gig economy for workers. See the text of AB – 5 here. AB 5 codifies into black letter law the California Supreme Court’s holding in Dynamex by adding Section 2750.3 to the Labor Code, amending Section 3351 of the Labor Code and amending Sections 606.5 and 621 of the Unemployment Insurance Code. AB 5 makes the Dynamex holding statutory. Also, it spells out several definitions and exceptions to Dynamex for certain professionals and occupations in Section 2750.3(b). These occupations are to be governed by the Supreme Court’s decision in S.G. Borell0 & Sons, Inc. v. Dept. of Industrial Relations (1989) 49 Cal.3d 341 (“Borello”). The Borello test is how independent contractor characterization used to be analyzed prior to Dynamex where the primary factor for determining contractor status is whether “the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.” Here are the AB 5 Borello exemptions now codified in Labor Code 2750.3(b):

  • Licensed Insurance Agents
  • Licensed Doctors, Dentists, Podiatrists, Psychologists, Veterinarians
  • Licensed Lawyers, Architects, Engineers, Private Investigators, CPAs
  • FINRA licensed broker dealers or investment advisors
  • Direct sales salespersons defined in Section 650 of the Unemployment Insurance Code
  • Commercial fishermen
  • Certain “Professional services” such as marketing, administrators of H.R., travel agent, graphic design, grant writer, fine artist, enrolled agents licensed by IRS, payment processing agents with independent sales organizations, certain photographers subject to specific rules, freelance writers, licensed estheticians, manicurists, barbers and cosmetologists subject to certain rules
  • Licensed real estate agents
  • Licensed repossession agents
  • Business to Business contracting relationships subject to certain rules
  • Subcontractors in the construction industry subject to certain rules
  • Subcontractors in the trucking industry subject to certain rules
  • Referral agencies and service providers

If you work in one of the above occupations such as the construction industry, cosmetology, trucking, photography that are subject to certain rules, have your contracts updated right away to comply with the new law.

**If your occupation is not listed as one of the exceptions above, the characterization of your relationship with your employer is under Dynamex, now Labor Code Section 2750.3 and you must be an employee if you are not performing work outside the usual course of the hiring entity’s business.**

Worker Remuneration

California maintains a complicated scheme for worker remuneration. Consider the following for a moment. A forklift operator, depending on the circumstances, is guaranteed a minimum wage and payment of overtime if certain work hours are exceeded as defined by the applicable wage order. If the same forklift operator uses his personal vehicle to pick up parts for the forklift, the operator is entitled to compensation for use of his personal vehicle under the Labor Code. If the operator is injured while on the job, his income will be dictated by workers’ compensation laws.  If the worker is unable to perform his/her job due to a non-work-related injury, the worker may be entitled to short-term disability under a different set of laws. These distinctions are important as Dynamex does not sweep the entire worker remuneration landscape. Instead, it focuses on claims brought for wage order violations.

Wage Orders

There are 17 wage orders in California broken down by industry and occupation. For the various industries and occupations, wage orders define minimum wage, overtime compensation, working conditions, meal and rest break periods, as well as employer penalties for failure to comply. When an employer fails to abide by the protections in a wage order, an employee can bring a lawsuit alleging such violation. Note that wage orders do not apply to independent contractors; independent contractors, therefore, are unable to bring lawsuits for violation of wage order protections.

Why Now

Consumer habits, technology, and the Internet have driven dramatic changes in how businesses operate and the competition businesses face. To meet consumer demand and stay competitive, businesses must continuously look at the costs of operation, human capital being one of the largest expenses. And considering the financial and administrative burden of maintaining employees in California, it is no wonder that employers often look for more cost-effective alternatives to maintaining a workforce. Classifying a worker as an independent contractor can provide some relief. As mentioned above, such classification provides additional relief in that employers are not required to abide by wage orders for the worker. Risk mitigation along with the reduction in human capital expense and administrative burden provide a strong incentive for abandoning the traditional employer-employee relationship in favor of an independent contractor relationship. While businesses and consumers benefit, an argument can be made that these changes have been to the disadvantage of workers. And that’s where Dynamex starts.

Dynamex Background

Dynamex provides package delivery service. Before 2004, drivers were considered employees controlled by wage order number 9.  In 2004, Dynamex reclassified these same drivers as independent contractors. In their lawsuit, Dynamex drivers alleged, among other things, that the misclassification of the drivers as independent contractors led to violation of provisions contained in wage order number 9. The Supreme Court case does not specify the wage order provision(s) violated, but it is safe to assume it had to do with regular or overtime wages.

Decision

In a very long opinion, the court concluded that a worker is presumed an employee for purposes of wage order applicability unless the employer can prove the worker is actually an independent contractor. The test for determining if a worker is an independent contractor as explained by the Court is the ABC test.

If the employer establishes all the following for a worker under the ABC test, the worker can be classified as an independent contractor in which case wage orders would not be applicable.

  • The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact.

  • The worker performs work that is outside the usual course of the hiring entity’s business.

  • The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Putting It Together

And as will likely be the case for your business, whether a work is an independent contractor is very fact dependent. The forklift operator can be used for illustration, but more facts are necessary. Assume the forklift operator owns his forklift and offers for hire lifting services. The operator’s specialty is boats. He receives a call from a boat owner whose boat has slipped off a trailer. The owner wants to hire the operator to lift the boat back on the trailer. Under the ABC test, the operator would be an independent contractor. Using A, B, and C above as a guide:

  • Other than the job to be performed, the operator has complete control over how to pick up the boat, the equipment necessary for the job and the strategy to be employed.

  • If the hiring business in the business of lifting boats, there would have been no need to hire the operator. The operator doesn’t seem to bear a relation to the hiring entity.

  • I am not personally aware of any independent forklift operators, but arguably they would be akin to tow truck drivers in this situation, which are often independent contractors.

Let’s change the facts a bit to more closely match the Dynamex case. Assume the operator is part of a fleet of forklift operators that respond to lift emergencies. The business provides the equipment and dispatches operators as needed. The business characterizes the workers as independent contractors.

  • It is still likely that the operator has significant control over the performance of the work, but if the operator is , the business does retain some control over who does what, and when. The business will likely fail to demonstrate the worker is an independent contractor under A.

  • The business operates a forklift service. The worker is performing work as a forklift operator. The services offered by the business are nearly indistinguishable from the work performed by the individual operator.The business will likely fail to demonstrate the worker is an independent contractor under B.

  • Most forklift operators I am familiar with support business operations and don’t operate independently of the parent business. However, the type of work described is analogous to truck and crane operators, which are often set up as independent businesses. It’s not entirely clear how the court would decide C.

Under this scenario, since the employer has failed to satisfy A, B, and C, the worker will be considered an employee and would be entitled to all protections of the applicable wage order, most importantly regular and overtime wages.

What Should You Do

If you have workers classified as independent contractors, not the plumber or electrician that you call on occasion, you should strongly consider the wage order applicable to the worker. If you determine there is no wage order applicable, that is the worker is exempt, the Dynamex decision should not prompt any changes.

If a wage order is applicable, there are a variety of factors to consider in determining whether to maintain workers as independent contractors or transition them to employees. This evaluation will be very fact dependent and will require a thorough review of the worker, worker’s responsibilities, company policies and procedures, and the applicable wage order. This evaluation may reveal that every protection and provision in the wage order are either met or exceeded minimizing the risk of a claim that would meet the criteria for evaluation under Dynamex. Trusted counsel can assist with this evaluation.

The Future

Because the Dynamex decision is narrowed to just violations of wage orders, and the remuneration scheme in California is impacted not only by independent contractor classification, but the remuneration scheme itself, I expect to see alignment across these schemes. For example, under the Labor Code, employees need to be compensated for mileage accumulated for work in a personal vehicle, but an independent contractor does not. The ABC test is currently inapplicable to determining who is an independent contractor under this Labor Code provision. Expect to see this change.

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