Businesses surprised, alarmed, over new narrower test for classifying independent contractors

By John Breslin | Jun 4, 2018

SACRAMENTO - Businesses are calling their lawyers and a trade organization in the wake of a decision by a California Supreme Court to substantially reduce the number of reasons a worker can be classified an independent contractor.

SACRAMENTO - Businesses are calling their lawyers and a trade organization in the wake of a decision by a California Supreme Court to substantially reduce the number of reasons a worker can be classified an independent contractor.

The court, at the end of April, ruled there are three factors to be taken into account when classifying a worker as independent, down from approximatrely a dozen.

Now, in California, independent contractors can be only be classified as such if they operate under one or more of three factors, the so-called ABC test.

They are that the worker is free from the control and direction of the employer, that an individual is performing work out side of the hirer's normal business, and/or that the individual is independent, essentially does work for other people.

The court also reiterated previous decisions that the presumption is that individuals are employees, and that it is up to the company to make sure an independent contractor classification is the correct one.

In the underlying case, a class action against courier and delivery service firm, Dynamex, was alleged to have misclassified drivers under California wage laws, which are regulated by the state's Industrial Welfare Commission (IWC).

The Supreme Court decision affirmed an appeals court ruling, which in turn had upheld a trial court's decision to certify the class action filed by the couriers and delivery drivers. 

That case will now continue in trial court, with the result likely to be heavily influenced by arguments over the ABC test.

Despite the case making its way through the appeals process, and to the Supreme Court, the result was still "a surprise for employers," said Elizabeth Milito, senior executive counsel with the National Federation of Independent Business (NFIB).

"It caught members off guard," MIlito told the Northern California Record. "It was a surprise because there was always a presumption over the status of independent contractors."

She added, "I know businesses are calling their lawyers and asking what should they do. And NFIB members who do not have lawyers are calling up" the organization's offices in California and even Washington.

"It does mean (employers) have to go through this ABC, and it is better off at a minimum saying 'I have got to really go back and closely scrutinize anybody that I have classified as an independent contractor'," Milito said.

Milito said a crucial question is whether the contractor is doing business for anyone else, or if, for example, the individual working as the information technology expert in a firm is "pretty much my IT person."

A review of records and classification of contractors could be done, in many cases, without a lawyer, Milito said.

California is the third state after Massachusetts and New Jersey to adopt the ABC test when it comes to classifying a worker as an independent contractor.

"The test did restrict the employers' ability to employ independent contractors, and resulted in a number of law suits in those two states, and did make it more difficult for employers," Milito said.

Costs to employers may increase as a result of the new law, Milito said, through compliance lawsuits and audits, even if ultimately there is found to be no wrong doing.

"Penalties can be very high and an investigation, not necessarily initiated by a worker, can be done by state agencies, labor bureaus, workers' compensation, even the insurance carrier," Milito warned.

The growth in the number of freelance, or independent, workers due mainly to the spread of the gig economy has led many states to consider introducing more protections against potential exploitation. Several cases are also making their way through the courts as California and the country tries to grapple with a rapidly changing employment landscape.

"It cuts both ways," said Milito. "You do not want to regulate too much to stop people doing freelance work, people who want to be free and want to be their own boss."

In California, the Supreme Court decision will affect a large number of workers, Michael Rubin, a partner at Altshuler Berzon LLP in San Francisco, told Bloomberg Law.

“This is picking up and accelerating a trend toward protecting workers that is essential for the state to do because right now the fed government is adopting a far more employer protective approach,” Rubin, who filed a friend of the court in support of the ABC test, told the news wire. 

Richard Reibstein, a partner at Locke Lord LLP in New York, told the same news service. “It will require hundreds of thousands of companies in California that lawfully created independent contractor relationships to reevaluate their classifications.”

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Organizations in this Story

Dynamex National Federation of Independent Business/ Save Americas Free Enterprise Trust

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