By: Hooman Yavi
Whether an individual worker can be classified as an employee or independent contractor has deep implications for businesses and workers.
If a worker is classified as an employee, the business is responsible for:
- Social Security and payroll taxes;
- Unemployment insurance taxes;
- Providing worker’s compensation insurance; and
- Complying with state and federal regulations on wages, hours, working conditions of employees
On the other hand, if the worker is classified as an independent contractor, the business would not be responsible for any of those costs and responsibilities, and workers would not receive any of the benefits.
On April 30, 2018, the California Supreme Court issued a ruling, Dynamex Operations West, Inc. v. Superior Court, which defined the standards for determining whether workers should be classified as employees or independent contractors for the purpose of complying with state minimum wage, maximum hours, and work condition regulations.
In the case, Dynamex drivers alleged that they had been misclassified as independent contractors when they should have been classified as employees, and as a result that Dynamex was in violation of its fair wage and other obligations to them as employees.
In its holding, the Supreme Court provided a test (the “ABC Test”) to determine whether a worker is properly classified as an independent contractor. First, however, it is important to know that the ABC Test assumes that all workers are employees and places the burden on the business to establish that the worker is an independent contractor, and requires the business to establish all three element of the ABC Test:
- The worker is free from the control and direction of the business in connection with the performance of the work, both under contract and in the actual performance of the work.
- A business can still have “control” and “discretion” over a worker’s performance even if the level of control or discretion is less than what the business would otherwise have over its other employees.
- The business does not need to control the precise manner or the details of the work to have control.
- The worker must have genuine independence to be classified as an independent contractor.
- The worker performs tasks outside the usual course of business.
- Any worker providing services to the business in a role comparable to that of an employee must be categorized as an employee.
- This includes any individuals whose services are provide within the usual operations of the business, and would ordinarily be viewed by others as working for the business as opposed to working for themselves or another company.
- For example, if a clothing store hires a plumber to repair a leak in the bathroom, the service provided by the plumber are not part of the store’s usual course of business, and therefore the plumber would properly be classified as an independent contractor. However, if a clothing store hires an at-home seamstress to make dresses, then the worker is part of the business’s usual operations and therefore must be classified as an employee.
- Courts will focus on the nature of the worker’s role within the business’s usual operations, and businesses will have to determine whether they could otherwise perform their day-to-day operations without that worker’s performance.
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
- Businesses cannot unilaterally determine a worker’s status simply by assigning the worker the label of “independent contractor” or by requiring the worker to enter into a contract that designates the worker as an independent contractor.
- To be classified as an independent contractor, workers must be able to establish and promote their independent business, for instance, through incorporation, licensure, advertisement, and offering their services to other businesses.
- The fact that a business has not prohibited the worker from engaging in such independent business actions does not establish that the worker has independently decided to go into business for himself or herself.
In conclusion, businesses now have the burden in establishing that their classifications comply with the ABC Test, and all California businesses using independent contractors should ensure that they are in compliance with the new standard. This may require contract revisions, but also structural changes to operations and other business functions. For businesses who can no longer continue to classify workers as employees as a result of the Dynamex decision, it will be imperative to ensure that the business is in compliance with wage, tax, and other labor code regulations.
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