While the Department of Labor inches closer to making a final decision on proposed overtime eligibility, the state of California is still debating the definition of an independent contractor. Both pending decisions will have a significant impact on California employers, workers and the state's business climate.
Who should be eligible for overtime pay is a question that has languished in a type of legal holding pattern since early in 2016. Recently, however, the U.S. Department of Labor (DOL) sent draft of the Notice of Proposed Rulemaking (NPRM) regarding overtime exemptions to the White House for review.
The first stop is the White House's Office of Information and Regulatory Affairs, or OIRA. And now the current government shutdown has held up progress of the DOL’s overtime rule going to the Office of Management and Budget for final review.
According to a January 22, 2019 post at Bloomberglaw.com,
"The proposal is pending review at OIRA, which is largely closed. That makes pushing overtime, or any regulatory matter, through to OIRA problematic...
Certain agency work is allowed to continue during a shutdown if it’s considered “excepted activity.” In other words, it has to be considered crucial to national security or safety. [And] overtime doesn’t fit the bill, no matter how much business lobbyists are pushing for a new rule.
To properly review a rule, OIRA must reach out to other federal agencies that may be affected by the proposal and to ensure there’s no overlap with similar work being done by the agency promulgating the rule. That’s not supposed to happen during the shutdown, when OIRA’s career experts are likely furloughed."
Uncertainty and the Proposed Final Rule
There are a few scenarios that could take place at this stage, but any final action prior to the resolution of the shutdown may mark the decision as subject to potential litigation by opponents. The public will not get to see the proposal until after OMB approves it for publication in the Federal Register.
The DOL's proposed rule would replace the final rule issued in 2016 if it is adopted. Under the Obama administration, the 2016 final rule was to increase the minimum salary level for exemption as an executive, administrative or professional employee from $455 per week, or $23,660 per year, to almost double at $913 per week, or $47,476 annually.
However, a suit was brought against the DOL by the U.S. Chamber of Commerce and other parties that succeeded in obtaining a permanent injunction to block the rule. The newly installed Trump administration appealed the decision, however, to the U.S. Court of Appeals for the Fifth Circuit. It also obtained a stay of the appeal pending further regulatory action.
Since then, the DOL had originally scheduled publication of a Notice of Proposed Rulemaking for October 2018, which was first delayed until January 2019 and then further delayed until March 2019.
Independent Contractors and Employee Classification Defined
In April 2018, the California Supreme Court unanimously adopted the so-called "ABC test" for classifying workers with its decision in Dynamex Operations West, Inc. v. Superior Court. That case involved a delivery company that had converted its drivers from employees to independent contractors.
The Court sided with the drivers and established the ABC test. This provides three criteria that an employer is required to meet in order to show that a worker is an independent contractor. Consequently, a worker can be only classified as an independent contractor if all three of these factors are met:
(A) "that the worker is free from control and direction" of the employer as it relates to performance of the work; and
(B) that the work is performed "outside the usual course of the hiring entity's business"; and
(C) that the worker engages "in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity."
Subsequent to this court action, Democratic Assembly Member Lorena Gonzalez has proposed California Assembly Bill No. 5 which would add the "ABC test" to state law.
A Case of Dynamex v. Borello
One of her Assembly colleagues, Republican Assembly Member Melissa Melendez, has also introduced a competing bill, California Assembly Bill No. 71. This new legislation, if passed, would add a new section to the California Labor Code codifying factors to be used to determine the status of an employee.
Also known as the Borello factors, these have been largely used in California already as a result of the "economic realities" test adopted by the California Supreme Court in the 1989 case of S. G. Borello & Sons, Inc. v. Dept. of Industrial Relations.
This new section proposed by Melendez, 2750.7, would provide, in part, the following:
"(a) Notwithstanding any other law, a determination of whether a person is an employee or an independent contractor for the purposes of this division shall be based on the multifactor test set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Relations.
(b) These factors include, but are not limited to, the following:
(1) Whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired, which is the principal factor.
(2) Whether the one performing services is engaged in a distinct occupation or business.
(3) The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision.
(4) The skill required in the particular occupation.
(5) Whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work.
(6) The length of time for which the services are to be performed.
(7) The method of payment, whether by the time or by the job.
(8) The right to discharge at will, without cause.
(9) Whether or not the work is part of the regular business of the principal.
(10) Whether or not the parties believe they are creating the relationship of employer-employee."
While it is too soon to know which, if either, proposed legislation will eventually become law, the issue is a significant one for California employers.
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