Why does it matter whether a company classifies you as an independent contractor or an employee? On the one hand, if a worker is an employee, the hiring business bears the responsibility of paying federal Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, providing worker's compensation insurance. The hiring business must also comply with numerous state and federal laws governing the wages, hours, and working conditions of employees, and reimburse workers for business expenses. On the other hand, if a worker is labeled an “independent contractor,” the business does not bear any of those costs or responsibilities — they fall entirely on the worker. The worker has no employee rights under the California Labor Code.
On April 30, 2018, in a groundbreaking decision, Dynamex Operations W., Inc. v. Superior Court, No. S222732, 2018 WL 1999120, (Cal. Sup. Ct. Apr. 30, 2018), the Supreme Court of California made it extremely challenging for companies to legally treat their workers as independent contractors.
The Court adopted a rigorous legal test, the “ABC” test. Under the ABC test, all workers in California are presumed to be employees for purposes of the California wage orders. This is a seismic shift - workers who receive a 1099 and/or who signed independent contractor agreements are presumptively employees until the hiring business proves the following:
(A) that the worker 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) that the worker performs 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, the worker should be considered an employee and the hiring business an employer under the suffer or permit to work standard in wage orders.
Significantly, under this test, the hiring company must prove A, B, and C. If it fails to prove any one of these, the worker is deemed an employee for purposes of the California wage orders. Relative to the prior test, this is an exceedingly difficult standard to meet, and one that companies are likely unprepared to meet.
The Court provided an example of a true independent contractor: when a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line. By contrast, the Court offered examples of workers who would enjoy employee status due to their integral role within the hiring entity's usual business operations: when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company… or when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes.
The Dynamex decision will undoubtedly have a dramatic impact across various industries that have a long-standing tradition of treating their workers as independent contractors as well as new and emerging businesses, such as those in the gig economy, where the independent contractor model is prevalent. Some of the jobs that may be affected are as follows:
Real estate brokers and agents
Barbers, hairdressers, and cosmetologists, nail-techs
Owner-operators in trucking companies
Loan officers and mortgage brokers
Ground maintenance workers
Child care workers
Farmers, ranchers, and other agricultural workers
Assemblers and fabricators
Editors, writers and authors
Gig economy workers
Many, many other workers who provide labor or services
Many companies that currently label their workers as independent contractors may be violating the law. Just because an individual works from home, signed an independent contractor agreement, and/or was given an IRS Form 1099, does not mean the worker is not entitled to employee protections and benefits. Wage and hour lawsuits on behalf of these and other workers may challenge their designation as non-employees and claim damages and penalties for minimum wage violations, overtime violations, unreimbursed business expenses, failure to provide meal breaks and paid rest breaks, and other claims under the California Labor Code. If you are or were classified as an independent contractor in California, please fill out this form or call us at 844-200-5623.