Last year, the California Supreme Court rewrote the law distinguishing between an employee versus an independent contractor in Dynamex v. Superior Court. The California legislature sought to codify this change and on September 18, 2019, it was signed into law.
California and the “ABC” Test
In Dynamex, the California Supreme Court laid out what it terms the “ABC” test to determine coverage under the Industrial Welfare Commission (“IWC”) Wage Orders. The new statute expands that decision to the entirety of California’s Labor Code.
Under the ABC test, a worker is assumed to be an employee. It is the burden of the business employing that to prove that the worker is not an employee, but an independent contractor. To do so, they must satisfy each of the three requirements of the ABC test:
- The worker must be free from the control and direction of the hiring party;
- The worker must perform work that is not in the “usual course” of the hiring party’s business; and
- The worker must be customarily engaged in an established independent trade, occupation, or business of the same nature as the work being performed.
It is the second element or the “B” of the ABC test that is particularly troublesome. This element of the test stands to disrupt the fundamental business model of many conducting business in California. For comparison, you can review the Internal Revenue Service’s guidance on Employer versus Independent Contractor Designation.
Why Employee Versus Independent Contractor Matters
Whether a worker is an employee or independent contractor is very significant for an employer. If a worker is classified as an employee, the employer bears the responsibility of paying social security and payroll taxes, unemployment insurance taxes and state employment taxes, providing worker’s compensation insurance, and of course, complying with the endless labyrinth of state and federal statutes governing the wages, hours, and working conditions of employees. If a worker is misclassified, the hiring individual or entity may then be exposed to liability for unpaid overtime, unlawful meal periods, unreimbursed business expenses, etc.
Independent Contractor Exemptions May Apply
Successful lobbying efforts directed to California legislators gained the inclusion of statutory exemptions that include numerous industries and professions. Some of those exemptions are for doctors, dentists, lawyers, engineers, accountants, architects, realtors, travel agents, graphic designers, human resources administrators, grant writers, marketers, fine artists, investment advisors and broker-dealers. Exempt occupations will remain subject to the traditional common law definition of employment.
Legal Review for California Businesses
The new law goes into effect on January 1, 2020. If your company uses independent contractors, consult with your legal counsel to determine whether this significant change in law creates liability or requires re-classification or other changes in your business. If you would like to speak with us, please feel free to contact us.
