Employees and Independent Contractors are as different as apples and oranges.
On September 18, 2019 Governor Gavin Newsom signed into law Assembly Bill 5. The untitled new law will have a significant impact on the gig economy in California. It will be increasingly difficult to lawfully classify California workers as independent contractors. With the exception of several significant carve outs, which I discuss below, the definition of “to employ” announced by the California Supreme Court last year in Dynamex v. Superior Court (2018) will define the relationship between the hired and the hiring party moving forward. The core of the new law takes effect January 1, 2020.
Dynamex is Now the Law of the Land (Most of the Land, At Least)
Assembly Bill 5 codifies the ABC Test adopted in Dynamex for most California workers currently classified as independent contractors. The ABC Test states that a hiring party “employs” a person (as an employee) unless it can prove each of the following:
A. The hired person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
B. The hired person performs work that is outside the usual course of the hiring entity’s business.
C. The hired person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
This three-pronged definition of “to employ” describes the prototypical independent contractor relationship: a plumber, for example. First, when I hire a plumber to fix a leak in my office, I do not exert any control of the performance of their work. The plumber does their job based on their best judgment using their own tools. Second, the plumber is not performing tasks that are within the scope of my law firm’s work. While my legal practice is broad in scope, plumbing repairs is not something Kitchin Legal offers to any client. Third, when the plumber finishes their work at my office, they will drive away in their company truck to another plumbing job for another client. They are engaged in an independent trade.
But there are significant exceptions under the new law. For a wide range of professionals exempted under AB 5, an older test of the employer-independent contractor will apply. However, even the exemptions themselves have multiple requirements.
The Existing Borello Test Will Still Apply to a Substantial Number of Workers in California
Prior to the passage of Dynamex last year, California courts relied on the “economic realities test” or “Borello Test” to determine whether someone was engaged as an independent contractor or as an employee. This test was announced in 1989 by the California Supreme Court in a case called S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) In Borello, the high court set out a multiple-factor test for evaluating the relationship between the hirer and the hired. While the most important indications of an employer-employee relationship under Borello are the hirering party’s right to control the work of the hired person and the hiring party’s right to terminate the worker at will, other factors are relevant to the determination as well:
- Whether the person performing work is engaged in an occupation or business that is distinct from that of the company;
- Whether the work is part of the company’s regular business;
- Whether the company or the worker supplies the equipment, tools, and the place for the person doing the work;
- The worker’s financial investment in the equipment or materials required to perform the work;
- The skill required in the particular occupation;
- The kind of occupation, with reference to whether, in the locality, the work is usually done under the company’s direction or by a specialist without supervision;
- The worker’s opportunity for profit or loss depending on his or her own managerial skill (a potential for profit does not include bonuses);
- How long the services are to be performed;
- The degree of permanence of the working relationship;
- The payment method, whether by time or by the job; and
- Whether the parties believe they are creating an employer/employee relationship.
Are You Excluded from the New Definition of “To Employ”?
Labor Code §2750.3 lays out the exceptions to the ABC Test for which the Borello Test will continue to apply. Exempted from the new definition of “to employ” are insurance brokers, doctors, dentists, lawyers, architects, engineers, private investigators, accountants, human resource professionals, investment agents, marketing professionals, certain salespeople, commercial fishermen, repossession professionals, construction sub-contractors, referral agencies, motor clubs (think roadside assistance) and real estate professionals. Freelance media-makers, including journalists, also are carved out of the ABC Test if they limit their contributions to any one media outlet to 35 pieces a year. AB 5 directs the courts to use the Borello Test definition of “to employ” in cases involving these professionals, and not the ABC Test.
Who Will be Affected by AB 5?
The media are reporting that up to two million workers will be affected as they are reclassified under the law from independent contractor to employee. While the media have focused primarily on the hundreds of thousands of Uber, Lyft and DoorDash workers who will affected, it is likely that the vast majority of affected workers currently work for small companies across the state.
Based on my experience representing misclassified workers in California, I have found that small companies, particularly tech start-ups, frequently classify workers as independent contractors because they believe it is easier and less expensive than hiring employees. These employers fail to factor in the cost of the wage and hour lawsuit that may follow.
What Do Misclassified Workers Have in Common?
In all of my employee-side, misclassification cases, my clients were trained and controlled by the employers. Their work hours were often scheduled by the employers. They were subject to discipline if they failed to perform as expected. They performed work directly related to the core business of the employers. Many of them worked full time, had company business cards, company email addresses and in one case, a company credit card. Almost all of them were paid by the hour. One of them earned performance bonuses. But, none of them was entitled to unemployment benefits based on their time working for these employers none was provided with workers compensation insurance coverage.
All of these workers ended their relationships with the employing parties because of a dispute over what and how they were paid, or over their opportunity to take meal and rest breaks. While some of them had issues about how they were scheduled for work, most of them accepted fairly strict control over their work schedules in exchange for their earnings. They all looked a lot like employees.
Finally, none of these clients fully understood the scope of the damages and penalties they were entitled to under California law until they spoke with an employment attorney. Their hirers’ decisions to classify them as independent contractors led to a wide range of violations and valuable claims.
What Do Companies That Misclassify Employees Have in Common?
I also have represented a number of employers in several different industries who faced misclassification claims. Based on my own experience, discussions with colleagues and the rich case law on the subject of the meaning of “to employ,” it is clear that companies that misclassify workers also share a number of characteristics.
First, most of these companies think they are saving money by avoiding the expenses of employing workers. Second, many of these companies fail to put into place wage and hour policies that comply with California law. Third, these companies typically do not have mandatory written sexual harassment and retaliation policies, and do not provide sexual harassment training to their workers as required by California law. Fourth, most do not provide their workers with paid sick leave in compliance with state and/or local laws. Fifth, these companies do not provide workers compensation insurance coverage. Fifth, these companies fail to reimburse their workers for business expenses, including cell phone plans, internet costs and transportation costs. Sixth, these companies do not comply with federal and state tax laws. Seventh, all these companies are vulnerable to costly lawsuits and governmental audits.
What Do I think About the Law?
Subject to the section 2750.3 exceptions, classifying someone else as an independent contractor who performs work within your business establishment and within the usual course of your business operations still most likely violates the Borello Test. It certainly violates AB 5 and Dynamex.
Similarly, having someone perform work within the usual course of your business from a home office also likely creates an employer-employee relationship. Under the ABC Test, it makes no difference whether the person signed an independent contractor agreement, sets their own hours, works relatively independently from direction or works from home. The focus of the inquiry is much more limited.
As an employment attorney, I have always been suspicious of companies that have more independent contractors working for them than they have employees. A disproportionate number of independent contractors might be evidence of an illegal scheme designed to avoid providing workers the benefits of employment: possible subterfuge. Under the Borello Test (i.e., Economic Realities Test), the court should take into account what relationship the parties themselves were attempting to form when they entered into the working arrangement. But the parties’ intentions do not matter under the ABC Test. Even under Borello, however, the Supreme Court warned parties to classify workers with care. “The label placed by the parties on their relationship is not dispositive, and subterfuges are not countenanced.”
Finally, I have found that the harder it is to justify a decision to classify someone as an independent contractor, the more likely it is that the person is actually an employee entitled to all of the benefits given to employees under the law.
What Should a Misclassified Worker Do Now?
Claims for unpaid wages are governed by a three-year statute of limitations. Under certain circumstances, a worker can reach back four years to recover unpaid wages pursuant to a misclassification claim. If a person has been working as a misclassified worker for more than one year and has not been paid for all work time, and/or has worked overtime hours without overtime pay, and/or has not been provided meal and rest periods, and/or has not been provided complete and accurate paystubs, and/or has terminated for complaining about any of these things, that person should speak with a lawyer.
If a person is currently working as an independent contractor and wishes to make a smooth transition to becoming an employee of the hirer, they should also speak with an attorney. As we move through this transition in California’s workforce, some employers are going to make efforts to pressure workers to sign illegal waivers of their right to obtain unpaid wages and penalties for past violations. At this moment in our history, workers in transition should reach out to a competent lawyer for advice.
What Should an Employer Do Now?
The first step every employer who regularly relies on independent contractors should do is to consult with an employment lawyer. This is a critical juncture for employers in California where risks that were once delayed for all sorts of reasons are at the door. Assembly Bill 5 did not radically alter the law. If a worker is deemed to be an employee under AB 5, it is most likely they will be deemed to have been an employee last week and last year in a lawsuit.
If hiring an employment attorney is not feasible, then employers should read about the new law. Check with industry groups about the effect of AB 5. Visit the website of the Division of Labor Standards Enforcement (“DLSE”) at https://www.dir.ca.gov/dlse/ I expect the DSLE will be issuing advisories he help in this transition.
Will AB 5 Slow “the erosion of the middle class and the rise of income inequality,” as it Promises in the Preamble?
By passing AB 5 into law, California has taken a substantial step in addressing the burgeoning gig economy and its impact on workers’ rights. The law is based on the assumption that most workers are better off as employees than independent contractors. Guaranteed minimum wage, paid sick and family leave, workers compensation coverage, unemployment benefits will be seen by many as a fair trade for giving up a little, or a lot, of scheduling flexibility.
Major critics of the law dispute this assumption and argue that this new law will be a jobs killer and will undermine the flexibility and profitability of the on-demand economy. In June, Uber CEO Dara Khosrowshahi and Lyft co-founders Logan Green and John Zimmer, co-wrote an op-ed piece for the San Francisco Chronical in which they stated, “…, most drivers prefer freedom and flexibility to the forced schedules and rigid hourly shifts of traditional employment; and second, many drivers are supplementing income from other work.” The new law, they have argued will require them to undertake a fundamental change in their business model and they warn of adverse effects on their operations and profits.
I am not certain who will be proved right over time. This is only day one, but I am leaning heavily in favor of any law that provides additional benefits to workers and helps to level the economic playing field. What is certain is that AB 5 is now one of the most complicated labor laws on California’s books. The core of the new law, Labor code § 2750.3, is nearly 4,000 words long, has a total of 109 separate paragraphs and makes reference to a host of other California codes and regulations. AB 5 also defines two distinct employment tests by reference to two California Supreme Court decisions separated in time by 30 years. Borello has a lengthy citation history as appellate courts have wrestled with its meaning and application. Already, Dynamex has been cited in nearly a hundred court decisions. Of course, no matter how clearly written, no appellate decision is immune from different interpretations by parties advocating from different positions over different interests.
The way these two pivotal cases and Assemble Bill 5 are applied to the thousands of employee misclassification claims that will be made in the coming years will define the nature and scope of the employment relationship in California with every-increasing clarity—at least many of us hope for that.