In order to protect your business, you need to know the law that affects your workers.
As a general principle, it is crucial that employers stay up to date with new developments in the law. Employers who currently have independent contractors working for them should carefully review their relationship to ensure it complies with the California’s dramatic recent change. One of TBBB‘s Blog Contributors, Kelly Duford, Esq. of Duford Law broke down the specifics of this landmark decision.
The Supreme Court of California issued a recent opinion that is causing businesses everywhere to re-evaluate their payroll, employment practices and monthly expenses. It is also affecting many people who have enjoyed the benefits of a side hustle. From working as a professional as an independent contractor to driving for Uber or Postmates, the CA supreme court has officially created a large road block.
In the April 30th opinion, available here, the court was faced with deciding the appropriate test for determining whether a worker should be classified as an independent contractor or an employee.
Employee vs Independent Contractor–why does it matter?
In recent years, the hiring of workers as independent contractors has skyrocketed. A 2016 study by economists at Harvard and Princeton universities estimated 12.5 million people were considered independent contractors, or 8.4% of the U.S. workforce.*
One reason the classification between employee and independent contractor is so important is because employees enjoy numerous benefits and protections not eligible to independent contractors.
Examples of these benefits:
- Over-time after 8 hours worked in a day
- A lunch break after 5 hours of working
- Two 10 minute breaks for a full day’s work
- An inability to join unions
- Unable to obtain protection from state laws governing the employer-employee relationship (including minimum wage and maximum work-week rules)
- Increased tax liability
- Additionally, the State of California benefits when workers are classified as employees as business are then on the hook for payroll taxes.
Why this ruling is so important?
“A” The first factor “A,” examines whether the worker is “free from the control and direction of the hirer in connection with the performance of the work.” A hirer must prove that the worker is not subjected to such control and direction to satisfy this factor.
“B” Factor “B” looks to see whether the “worker performs work that is outside the usual course of the hiring entity’s business.” Therefore, a hirer must demonstrate that the worker is performing services outside the scope of the business.
“C” Lastly, factor “C” requires proof that the worker is primarily “engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.” Factor “C” requires the hirer to prove the worker has independently engaged in the activities being performed for the hirer.
In other words, an employer must now meet the above “ABC” factors to prove that their workers are independent contractors and not benefit-entitled employees. Each one of these requirements needs to be met in order for a court to recognize an independent contractor classification.
The court suggested the ABC factors are primarily in place to prevent hirers from evading their legal obligation to employees through intentional misclassification. The court continuously drew attention to the vulnerability and loss of protection employees who are misclassified as independent contractors may face. This concern is evident by the court’s emphasis of the presumption of employee, not the other way around.
The court had a valid concern about the misclassification of employees–i.e., protecting independent contractors who aren’t really “independent.” However, the opinion seems to neglect the technological advancements that have contributed to the rise of the “gig” economy, where independent contractors have informal and transient forms of employment with companies such as Uber, Lyft, GrubHub. Additionally, the recent boom in personal payment methods such as Venmo and The Square have only bolstered the “gig” economy and made it easier for workers to have more autonomy.
What effect will this have on “gig economy” employers?
The question then becomes whether presumptively classifying all workers as employees will put independent contractors and hirers engaging in the “gig” economy to a screeching halt, and could likely affect to nearly every employment sector.
It will be interesting to see what happens in the near future and to see the reorganization that will have to take place now that many workers who were classified as independent contractors are now deemed employees.
The ruling could be a major blow to gig economy companies and is likely to lead many employers in California to immediately question whether they should reclassify independent contractors, rather than face stiff fines for misclassification.
[Keep in mind: This blog is for informational purposes only and any legal questions about your business should be directed to a licensed attorney in your State.]
Questions about this recent change in CA law? Talk to your attorney, or contact Kelly Duford, Esq. @ dufordlaw.com