California Legislature Further Closes Independent Contractor Loopholes

By Brian E. Koegle
 
Since the California Supreme Court issued a ruling in April 2018 (Dynamex Operations West, Inc. v. Superior Court), California businesses have been scrambling to decipher the scope and application of the court’s ruling.  Flash forward to September 18, 2019, when Governor Gavin Newsom signed Assembly Bill 5, and a number of significant questions still linger over who can and who cannot be classified as an independent contractor.

As a brief refresher, the Dynamex ruling set forth a new “ABC test” to help inquiring employers understand when, at least according to the California Industrial Welfare Commission wage orders, a worker must be classified as an employee, rather than an independent contractor.  As applied, the new test resulted in most independent contractor relationships now qualifying as employment relationships.  As part of the “ABC Test,” a business has the burden of proof on all of the following factors in order to establish that the worker is an independent contractor:

A) That the worker was free from control and direction of the hirer in connection with the performance of the work, both under the contract for performance of such work and in fact; AND,
B) That the worker performed work that is outside the usual course of the hiring entity’s business; AND,
C) That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

​If the business is unable to prove, through a preponderance of the evidence, that each of the following statements is true and accurate, the worker “defaults” back to an employee, and must be afforded all of the protections and privileges of the California wage orders and the California Labor Code (i.e., payment for overtime hours worked, provision of meal and rest periods, protections under the California Workers’ Compensation Act, and withholding of all required federal and state taxes from wages earned).

The California Legislature then codified the “ABC Test” into the California Labor Code as part of AB5.  In the days leading up to the bill’s signing, a number of groups lobbied for, and were granted, exemptions from the application of the ABC Test. Among the lucky professions which were exempted are lawyers, doctors, hairstylists, barbers, commercial fisherman, marketing professionals, fine artists and payment processing agents. Notably absent from the list of exempted professions are all those workers performing services in the so-called “gig economy” – think Uber and Lyft drivers, GrubHub, Postmates, and all of our favorite convenience-based enterprises. The commonality or rational for granting some groups exemptions over others is not readily apparent (unless you follow the lobbying monies on either side of the issue). The effect of exemption means that workers under these selected professions are analyzed under the predecessor to Dynamex, known as the “Borello test”. By all accounts, it is much more difficult to establish independent contractor status under the ABC test over the Borello test.
 
Although the law has an effective date of January 1, 2020, the Legislature has assigned a retroactive effect, since the provisions of AB 5 were described as “an interpretation of existing law.”  Consequently, business owners may become liable for violations in the past, dating back three (and possibly four) years.
To provide context for the risks businesses are facing, the following are among the damages available to workers who have been misclassified:

• Economic damages, including unpaid overtime, missed meal and rest period penalties, contribution for the employer’s portion of the state and federal tax liabilities, etc.
• Statutory penalties – Labor Code Sections 226.8 and 2753 impose steep penalties on employers who willfully misclassify employees – up to $25,000.00 per worker.
• Private Attorneys General Act (PAGA) penalties – for “aggrieved employees” who were misclassified.
• Attorneys’ fees – not just to defend against the claim, but also an awardable element of damages to the prevailing employee who establishes a misclassification.

Following the clarifications provided by AB5, the law makes it extremely difficult to keep a worker classified as an independent contractor, except in very limited circumstances.  Further, the burden of proof falls squarely upon the employer to prove/establish that the independent contractor label is properly applied. The potential exposure and costs associated with misclassification can be quite substantial.  Consequently, employers are strongly encouraged to meet with qualified employment counsel to discuss the implications of, and the application of the ABC Test to any independent contractors.  

About Brian E. Koegle

Brian Koegle is a partner in the employment and labor law department of Poole, Shaffery & Koegle, LLP. With a focus on labor and employment law, Mr. Koegle provides counsel to employers across various industries regarding hiring practices, employment contracts, wage and hour issues, compensation, discipline and termination matters.