Independent contractors are a beneficial tool for companies, especially new or growing organizations that are not yet equipped to manage employees. However, recent rulings and the legislature have severely restricted the ability to properly classify workers as independent contractors in California. Companies are encouraged to seek legal advice for any independent contractor relationships.
Because independent contractors are not employees, companies that use them avoid certain obligations and expenses in the areas of wage and hour compliance, tax and insurance obligations, immigration law compliance, the Affordable Care Act, as well as worker’s compensation coverage.
What is an Independent Contractor?
An Independent Contractor is “any person who renders service for a specified recompense for a specified result, under the control of his principal as to the result of their work only and not as to the means by which such result is accomplished.” (California Labor Code §3353.) Generally, an independent contractor is a worker who offers their services to the public for a fee, is not economically dependent on any single company, and is not an employee.
An independent contractor typically does not receive company-sponsored benefits, does not perform the same work as the company’s employees, and does not have the “indicia” of an employee, such as company uniforms, name badges, or business cards.
An employee, by comparison, is subject to significant oversight and control by the company and is generally:
- Paid wages and receives company-sponsored benefits.
- Employed for a continuous period and performs whatever tasks the company requires.
- Has taxes withheld from their wages.
- Is economically dependent on the employer.
- Protected by federal, state, and local employment laws.
The Dynamex Decision
In April, 2018, the California Supreme Court issued its landmark decision in Dynamex Ops. West, Inc. v. Super. Ct. (2018) 4 Cal.5th 903. The case set forth a new standard (the A-B-C test) for evaluating the classification of independent contractors and creates a presumption that a worker who performs services for the hiring entity is an employee for purposes of wage and benefits claims unless the hiring entity can prove all of the following:
(A) the worker is free from the hiring entity’s control; and
(B) the worker performs work outside the usual course of the hiring entity’s business; and
(C) the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.
The Dynamex decision put many independent contracting relationships at risk, primarily based on the B-prong of the test, that the worker performs work outside the usual course of the hiring entity’s business.
Passage of AB5
Effective January 2020, California passed AB5, which codifies and expands the application of the Dynamex test and incorporates it into the California Labor Code (Section 2750.3.) AB5 also allows for the common law, less restrictive “control test” from S.G. Borello & Sons, Inc. v. Dept. of Indus. Relations (1989) 48 Cal.3d 341(the “Borello” test) to apply to certain industries. The bill exempts the following professions from the ABC test: licensed insurance agents; licensed physician/surgeons, dentists, podiatrists, psychologists, or veterinarians; licensed professionals such as lawyers, architects, engineers, private investigators, and accountants; registered securities broker-dealers or investment advisers; direct sales salespersons (as described in UI Code § 650); and commercial fishermen.
Within contracts for “professional services” (such as marketing, human resources administration (with caveats), travel agents, graphic designers, grant writers, fine artists, payment processing agents, still photographers or photojournalists, freelance writers/editors/newspaper cartoonists, workers providing cosmetology or barbering services (with caveats), real estate licensees, and workers at repossession agencies), AB5 provides that the Borello test, not the more draconian Dynamex test, should control if the hiring entity proves that the individual/independent contractor:
- maintains a business location apart from the hiring entity;
- has a business license;
- has the ability to set/negotiate their own rates;
- has the ability to set their own hours;
- holds themselves out to other potential customers in the same type of work; and
- regularly/customarily exercises discretion/independent judgment in the performance of services.
Dynamex and AB5 have severely limited a company’s ability to lawfully retain workers as independent contractors. To minimize the risks of exposure for misclassification claims either through direct lawsuits or audits, companies and hiring entities should seek legal advice to evaluate any and all independent contractor relationships. Unless a careful legal analysis of the specific facts and duties of the services being provided is conducted, the hiring entity faces exposure for misclassification lawsuits and costly assessments and penalties by state agencies through their audit procedures.
Disclaimer: This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice.