In recent years, the practice of hiring workers as independent contractors has increased significantly. One possible explanation for such trend, as opposed to merely hiring workers as classified employees, is that California employers are not exposed to the threat of liability for meal/rest break, overtime, minimum wage, waiting time penalties and/or principal-agent liability when hiring independent contractors. Further, if a worker is classified as an employee, then of course the employer is responsible for Social Security, payroll, unemployment insurance, and state employment tax, as well as worker’s compensation insurance. Employers have to be extremely careful in how they classify employees versus independent contractors because California imposes substantial civil penalties – between $5,000 and $25,000 per violation – on those employers that willfully misclassify workers.
In a recent California Supreme Court decision, Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County, the state’s highest court adopted a new legal test that will make it more difficult for employers to classify workers as independent contractors. Although most of the publicity regarding the decision tends to focus on gig economy employers such as Uber, Lyft, Grubhub, Amazon, etc., the decision will have an impact on nearly every employment sector and employers small and large. The ruling will lead many California employers to immediately question whether they should reclassify independent contractors rather than face stiff fines for misclassification.
The Dynamex court set aside the broad multifactor test previously used in California in favor of the narrower “ABC” test currently adopted in many other states. Under the new test, workers are presumed employees unless the employer demonstrates the workers are in fact independent contractors by proving: (A) that the worker is free from direction and control from the employer in how to perform the work; (B) the work performed is outside the usual course of work performed by the employer: and, (C) that the worker is engaged in an independently established occupation of the same nature of the work performed. Each of the three “ABC” requirements must be met in order for an employer to rebut the presumption that a worker is an employee and not an independent contractor.
The Court reasoned that California labor regulations and taxes, such as wage and hour laws applicable to employees but not independent contractors, were adopted to enable workers to earn a certain standard of living, to protect worker health and safety, and to shield the public from assuming the financial responsibility for substandard wages or unsafe working conditions. For example, according to the California Labor Commissioner’s website, the misclassification of workers as independent contractors costs California roughly $7 billion a year in lost payroll taxes.
The Dynamex decision has a wide-reaching impact on countless California employers who have turned to hiring independent contractors to stay flexible, cut costs and to evade regulatory burdens. Industries such as transportation, courier services, construction and hair salons, to name just a few, rely heavily on the independent contractor labor model. California’s recent shift to narrow the definition of independent contractors will likely provide more opportunity for workers to sue employers, suits which were already commonplace in California before the Dynamex decision. Following Dynamex, California employers may need to restructure their employee classifications to mitigate the risk of costly litigation and statutory penalties. For example, prong B of the ABC test could prove problematic for any employer that uses independent contractors to deliver their core product or service. As noted in Dynamex , a plumber who is temporarily hired to repair a leak or an electrician who is hired to install a line is an independent contractor; while a seamstress working at home to make dresses for a clothing manufacturer, using cloth and patterns supplied by the manufacturer, or a cake decorator working on a regular basis for a company providing custom-designed cakes, must now be classified as employees rather than independent contractors.
A recent California Court of Appeal decision applying the Dynamex decision, Garcia v. Border Transportation Group, LLC, differentiated between a plaintiff’s claims under the Industrial Welfare Committee (IWC) Wage Orders and non-Wage Order claims. The Wage Orders regulate basic working conditions for California employees, including minimum wage, meal breaks, and rest periods. However, the Garcia Court held that non-Wage Order claims, such as overtime, waiting time penalties, certain expense reimbursements, or claims for wrongful termination, are not subject to the Dynamex ABC test. These non-Wage Order claims are instead subject to the less stringent multi-factor Borello test.
The Court of Appeals’ ruling in Garcia provides some helpful insights as to scope and application of Dynamex to California employers. However, it’s still early in the post-Dynamex fallout, and Garcia is one of the first appellate court decisions to apply the new Dynamex standard. Moreover, Garcia could very well be appealed, so the current Garcia holding may not be the end of the story.
While the Legislature failed to step in last year and provide any relief to soften the impact of Dynamex to California employers, there is a flurry of discussion about legislative efforts next. Of course, whether any legislative action will take place, and if so what that legislative action may be, is still up in the air. As such, California employers should closely examine whether their existing independent contractor classifications conform to the new and more rigorous California standards.
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