Hiring independent contractors can be a truly cost-effective solution for many businesses. But managing the proper employee classification compliance is challenging. Now it has just gotten harder.
On April 30, 2018 the California Supreme Court ruled on a case involving the status of independent contractors versus employees. Unfortunately for employers in California, the ruling in the appeal of Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County has made the determination test much more stringent.
Independent Contractor vs Employee
This is an issue that has become more prevalent over recent years due, in part, to an increased number of claims and lawsuits. The recent California Supreme Court case is just another in a series of decisions that tend to favor an employee status.
The company in the case, Dynamex, is a package and delivery company that had classified its drivers as contractors. This allowed them to forgo its obligations under California Industrial Welfare Commission wage orders in regards to the wages, hours, and other working conditions for employees.
However, the court adopted the so-called “ABC test” to make its determination of the worker's status. California had previously used a multi-factor test that focused on the level of control the employer had over the performance of the worker’s duties.
The ABC test presumes a worker is an employee unless the hiring entity proves the following:
(A) The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact.
(B) The worker performs work that is outside the usual course of the hiring entity’s business.
(C) 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.
HR Daily Advisor quoted attorney Todd Wulffson's explanation of the impact of this ruling's choice,
“Under this new test, the majority, if not the vast majority, of current independent contractors should be reclassified as employees—particularly people driving in the gig economy,”
The concern among labor attorneys and others in regards to this decision is that employers may still be required to classify workers as employees even if the employer exercises no control over the worker and even if that worker does work for other clients.
California Labor Law and Employee Lawsuits
A common class action issue is the misclassifying of employees as independent contractors. This impacts not only employers, but bonafide contractors, as well. The U.S. Department of Labor (DOL) has its own economic reality test that is comprised of seven factors which focus on the level of control the employer extends over the worker.
The DOL has recently been engaged in an increasing number of misclassification claims with the view of discouraging businesses from unlawfully avoiding payroll taxes. The new California ABC test, however, is far more stringent than the DOL's test in determining this.
The Court's decision focused on the language of the law and determined that the,
“suffer or permit to work definition is a term of art that cannot be interpreted literally in a manner that would encompass within the employee category the type of individual workers . . . who have traditionally been viewed as genuine independent contractors who are working only in their own independent business.”
As a result of this recent ruling, businesses and employers in California hiring workers classified as independent contractors should review their relationships in light of the “ABC test” to determine whether any or all such workers should be reclassified. This should be done in conjunction with legal representation, as well.
A Partner for HR Management Best Practices
Accurate and timely management and compliance practices are required for HR professionals in every business. Maintaining this can be challenging, but there are options.
Accuchex is a reputable workforce management services provider and can not only assist you with the burden of your ongoing compliance demands, but can potentially prove to be a more cost-effective solution, as well.
Click the button below to learn what you need to know about labor law in California. For more immediate information, feel free to call Accuchex Payroll Management Services at 877-422-2824.