Independent Contractor or Employee? Untangling New CA Employment Laws

Recently, the California Supreme Court decided a case that significantly changes the rules regarding independent contractors. There are many, many contractors that are intentionally misclassified by employers. Courts are cracking down, and the rules are getting stricter. To stay in compliance and avoid lawsuits and penalties, it’s important to stay on top of the law.

 

I. The New Rule

The California Supreme Court provided a new rule for whether someone is considered a contractor or employee.This case dealt specifically with wage orders, which determine minimum wage, maximum hours, and working condition requirements for specific industries. The case, Dynamex Operations v. Superior Court, provides a three-prong “ABC Test” to determine whether a worker is an employee.

A.   The worker must be “free from the control and direction of the hirer”;

B.   The worker must “perform work that is outside the usual course of the hiring entity’s business”; and

C.    The worker must “customarily be engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.”

A worker MUST meet each of these three requirements, or she is presumed to be an employee. Parts A & B are relatively straightforward, so let’s discuss those before diving into the more troublesome prong, Part B.

 

PART A

This part looks to the right of control and is similar to the analysis that would have taken place under the old law. LIST FACTORS

 

PART B

The Court after providing this new ABC Test, provided some examples on contractors who satisfy the Part B requirement. One example was a retail store who contracts with a plumber for repairs. This example, unfortunately, does little to help most businesses since it is overly simplistic and doesn’t consider the more nuanced circumstances for modern, small businesses.

Another case provides an example which would fail this part of the test. The Court stated, “if a bakery hires cake decorators to work on a regular basis, then those cake decorators are likely working within the bakery’s ‘usual business operation,’ and thus would be employees.” 

What is interesting in this quote are the words “work on a regular basis.” What would be the outcome if the bakery hires a cake decorator on a non-regular basis to help with one or two cakes? This leads to the question of what “usual business operation” means in this Part B. It begs the question of “Why did the Court choose to emphasize a contractor/employee hired to perform work on a ‘regular basis.’”

 

PART C

If I, an attorney, contract with someone to take my brand photos, that contractor must be in business as a photographer. There is one other trick to this in the word “established.” The worker must have an established business. Consideration whether the worker has their own tools, EIN, business bank account, local business license, website, and business cards.

 

III. What this Actually Means for Small Businesses

The Dynamex case specifically dealt with wages orders. For workers who would have been contractors but now are reclassified as employees, the law will require employers to do the following:

  • Record hours worked;

  • Pay overtime;

  • Provide meal and rest periods; and

  • Be responsible for appropriate working conditions;

What wage orders do not cover:

  • Federal wage/hour laws;

  • OSHA rules;

  • Anti-discrimination policies;

  • Vicarious liability for torts;

  • Reimburse reasonable and necessary business expenses;

  • Benefits obligations; and

  • Tax withholdings

The courts may extend the Dynamextest to other areas of the California Labor Code, those in the second bulleted list. For now, it only changes businesses obligations in regard to the first list. Most cases that will be filed under this new law will be class action lawsuits. Most often one worker does not have large enough damages to justify retaining an attorney. Rather, groups of workers file a class action against a business for penalties, unpaid overtime, meal break violations etc. The risk of a small business owner with a few contractors is relatively low.


V. Practical Tips for “DynamexEmployees”

Here are some tips moving forward:

  • Make sure contract workers use their own equipment;

  • Ensure that the contractor has taken steps to form their own business;

  • Put an arbitration clause into your contractor agreement;

  • Know the wage orders, stay in compliance with them, and make them accessible to the worker.

 

VI. Conclusion

The Dynamex case dealt with a large group of drivers who had been reclassified from employees to independent contractors by the company paying them. The Court seems to want to crack down on large companies taking advantage of workers by misclassifying them. In order to ensure workers are being paid fairly for overtime and given the appropriate breaks, it makes sense that the Court wishes to place stricter rules on the employee/contractor determination.

Looking at the case from a freelancer, small business perspective, it seems to deal a huge blow and unfairly impact both small companies and freelancers who rely on one-off projects to drive business. We can’t know for certain how the courts will resolve these issues and their impact on small businesses; however, I am hopeful that policy motivations will pursue the courts to act favorably toward the entreprenuer industry.


Want Some More Info!?

I wrote a more comprehensive article on this topic, which you can grab here. If you want some more info on hiring employees and other legalities, you may want to grab a copy of Phase 4 of the Small Biz Start Up Guide.