November 10, 2020
Do you know the difference between an employee and an independent contractor?
There are significant legal distinctions between an employee and an independent contractor. However, prior to the passing of Assembly Bill 5 (“AB5”), the ABC test, and Proposition 22, it was not always easy to tell which category a particular worker fell into. Since the advent of the “gig economy,” entire industries have shifted from an employment model to an independent contractor model. The trucking, courier, and construction industries, for example, have been impacted.
Independent contractors, unlike employees, enjoy flexibility in how they spend their time. They can accept or reject job projects as they choose, and take time off when they like. On the other hand, independent contractors are not covered by employment laws requiring minimum wage, payment for overtime, workers’ compensation coverage, unemployment pay, and many other employee-only rights and protections.
How does a business properly classify its workers as employees or independent contractors?
For years, there was no simple, uniform test for classifying workers. Simply calling workers “independent contractors” or having them sign an agreement saying that they are not employees is not determinative. For example, the California Supreme Court ruled that even where a group of farm workers worked independently under a written “sharefarming” agreement and agreed in writing that they were not employees, they were still employees as a matter of law for public policy reasons and were therefore entitled to certain legally-required employee benefits including workers’ compensation coverage. [S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 341.]
For decades, a “particular circumstances” analysis required considering a host of factors. [S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations, supra.] Some of these factors applied directly to the work, such as who provides the tools and the place of work, while other, more nebulous considerations included looking at the usual employment custom in the industry and determining the original intent of the parties. [Id.]
This formerly used multi-factor test allowed businesses to misclassify many workers as independent contractors and thereby reduce their employee-related costs. California’s Division of Labor and Enforcement Standards determined that misclassifying workers cost the state $7 billion annually, in part because many workers were forced to rely on public welfare benefits when they got sick, were laid off, or were injured at work. Meanwhile, businesses that correctly classified their employees as employees, and provided them with benefits, were also hurt by the practice of worker misclassification, because these more responsible businesses faced unfair competition from those other businesses that misclassified their workers to cut costs.
On April 30, 2018, the “employee or independent contractor” analysis changed for all California employers with the unanimous California Supreme Court decision, Dynamex Operations West, Inc. v. Lee. [Dynamex Operations West, Inc. v. Lee (2018) 4 Cal.4th 903.]
Dynamex and California implications
In Dynamex, the California Supreme Court made it harder for employees to be misclassified as independent contractors by limiting the “employee or independent contractor” analysis to three clear elements. These elements are whether the worker is (A) free from the hirer’s direction and control in performing the work, (B) doing work that is outside the usual course of the business, and (C) customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hirer. Workers are presumed to be employees, not independent contractors. Where a worker challenges being classified as an independent contractor, the hiring business bears the burden of proving all three factors, which the Dynamex court called the “ABC test.”
Under Dynamex’s ABC test, any business that controls the worker’s performance of the work (maintaining the right to set the pay rate, direct the work, and impose discipline on the worker) must provide the worker with required employee benefits, even if the business forces the worker to act otherwise as an independent contractor. For example, a trucking company which claims it has no employee drivers, but directs each truck driver’s work, determines what to pay them, and imposes discipline on them, would likely be deemed by the court to have misclassified its drivers, and would be required to provide its “independent contractor” drivers with legally required employee benefits.
Dynamex’s ABC test was codified in AB5
In September 2019, Governor Newsom signed AB5, which codified the Dynamex decision into law. This bill created the presumption that a worker is an employee, not an independent contractor, using language from the Dynamex ABC test.
It was the hope that the new ABC test, being clearer and easier to enforce than the pre-Dynamex test, would result in millions of currently misclassified California workers receiving employment benefits as their employers complied with the new legal requirements. However, AB5 has not been well received.
Please read our article How California’s Gig Economy Responded to Assembly Bill 5 to learn more regarding the reception of AB5.
Exemptions to AB5
AB5 granted an exemption for bona fide business-to-business contracting relationships. To extend this exemption to other businesses, the California State Legislature passed Assembly Bill 2257 (“AB2257”). Together, the two bills exempt the following professions from the ABC test:
– Professional service contractors;
– Securities broker-dealers or investment advisers;
– Certain medical professionals;
– Performance artists;
– Private investigators;
– Home inspectors;
– Conductor of international exchange visitor programs;
– Competition judges;
– Direct sales salespersons;
– Commercial fisherman;
– Licensed real estate agent;
– Repossession agents;
– Subcontractors for construction contractors and trucking services; and
– Individuals performing services for a certified motor club.
In response to AB5, app-based driving companies like Uber and Lyft rallied together and funded Proposition 22, which passed in November 2020. At $200 million spent on the proposition, Proposition 22 is the most expensive ballot initiative in California history. The proposition defined app-based drivers as independent contractors, not employees. To be considered an employee of an app-based driving company, the company would have to set the driving hours, require the driver to take rides, and restrict the driver’s ability to work for other companies. The proposition mandated minimum earnings for the drivers, healthcare subsidies, and automobile insurance.
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This article is based on the law as of the date posted at the top of the article. This article does not constitute the provision of legal advice, and does not by itself create an attorney-client relationship with Eskridge Law.