Will California Employment Law Change How Contractors Are Classified? – Info Entrepreneurship

Yaya: Kevin, a lot of people reading this may not have a law background, but have heard that changes coming down the pipe might affect a broad range of people, from contractors in the gig economy to self-employed independent contractors and the businesses that employ them. Can you give us a layman’s overview of what’s happening in the legal landscape around the gig economy and the classification of employees and contractors?

Kevin: Sure thing. In short: when it comes to minimum wage and overtime laws, California‘s test for determining whether a worker is an employee or independent contractor used to involve analyzing 12 different factors, none of which were absolutely required for an independent contractor relationship. However, Dynamex changed that, and many companies in the gig economy might have trouble satisfying the new test.

Yaya: What actually came out of the Dynamex case? What does the ruling mean and what, if any, changes does it dictate?

Kevin: Well, instead of the old multi-factor test that looked at 12 different aspects of the worker-employer dynamic, Dynamex says that in order to set up an independent contractor relationship, the hiring entity must satisfy a three-factor “ABC test.” There are variations of this test in other states, but the rule that the California Supreme Court adopted says that the hiring entity must establish:

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; and

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 of the same nature as the work performed.

In terms of changes to expect out of this ruling, I’d say that the most immediate consequence would be that companies, which have the burden of proof in demonstrating the ABC criteria, will request more information about prospective service providers than they have in the past. Since the previous multi-factor test didn’t set out any hard requirements, companies that hire independent contractors probably haven’t been collecting documentation related to the ABC test.

Another thing to note is that Dynamex only focuses on one context: the definition of an employee for purposes of California wage orders. These orders cover issues like minimum wage, overtime, and rest periods, but not other benefits such as health insurance, unemployment, and workers’ compensation. As a result, it’s possible that an employer would provide minimum wage and overtime to workers, but not health insurance, since that’s not required under the applicable wage order. However, over the next few years, I’m sure we’ll see more caselaw developing on whether the ABC test would be adopted in other contexts.

Yaya: What states does this kind of case precedent currently affect? For people who don’t live in these states, do they need to worry about these cases?

Kevin: While Dynamex only acts as binding precedent in California, the case could be persuasive to other states looking to adopt or apply the ABC test. In fact, in writing the Dynamex opinion, the California Supreme Court cited cases from Connecticut, Maine, Massachusetts, New Jersey, and Vermont, each of which have already adopted some form of the ABC test for purposes of employment law.

For people outside of these states, Dynamex just adds California to the growing list of states that have adopted the ABC test. It’s certainly possible that companies that have a national presence will modify their hiring arrangements nation-wide in order to simplify the logistics of managing workers.

Yaya: How does the “ABC” rule work? Do all three clauses need to be met for someone to be classified as a contractor? For example, many consultants might have incorporated their own business (meeting the third requirement) however also be performing responsibilities core to the central business. How does the “ABC” rule apply to them?

Kevin: Yes, the hiring entity has the burden of satisfying all three factors of the ABC test. Furthermore, the Court specifically mentioned that it’s often easier to analyze the B and C prongs of the test, and that courts are free to consider the factors in any order. As a result, a court could rule in a case that part B was not satisfied, and just end the analysis there.

In the example you laid out, it sounds like the hiring entity would have a hard time arguing that they’ve satisfied part B of the ABC test. If the consultant is performing work that would reasonably be viewed as being within the usual course of business of the hiring entity, then the consultant is an employee for the purpose of wage orders in California — even if the consultant has formed their own separate legal entity. If their services are core to the central business, it sounds like an outside observer would reasonably believe that the contractor is working in the hiring entity’s business, and not in the contractor’s own independent business.

The classic example of an independent contractor is a plumber who visits a brick‑and‑mortar retail store to fix a leak in the restroom. While a leak-free restroom is a crucial component of the customer experience, a reasonable outside observer would not believe that the plumber works as an employee of the retail store. The plumber doesn’t come to the retail store every weekday from 9:00AM to 5:00PM. The plumber doesn’t wear the store uniform. The plumber doesn’t ask the manager about the steps for replacing the P-trap underneath the restroom sink. But the plumber does perform services for other clients who also have leaky pipes, the plumber has a professional license to perform their services, and the plumber has their own legal entity for which they advertise and market their plumbing services.

The further away you get from this example, the more likely the relationship would be viewed as that of an employee.

Yaya: Can you walk us through how this will affect each group? Let’s start with employers that have hired independent contractors and are weighing whether they will need to convert them to full or part-time employees.

Kevin: Employers that have hired independent contractors in California will want to document that they have satisfied the ABC test with respect to each contractor. For prong A, this might come in the form of a written services agreement with a statement of work that stipulates that the contractor retains control over the performance of the work. Additionally, the employer should actually follow the contract and refrain from controlling or directing the contractor in performing the work. For prong B, this could be a document that describes the specialized expertise required to perform the work, which would be unreasonable for the hiring entity to develop in-house, as the work is not needed on a regular or continuous basis. Furthermore, the employer should not hold itself out as a provider of those services in its advertisements. For prong C, this might entail collecting business cards or other marketing materials from the contractor that demonstrate that the contractor has sought out other clients. Showing that the contractor has a professional license to perform the work (e.g., plumbing, electrical, accounting, etc.) would also bolster this prong.

Yaya: How about people working as contractors and freelancers in the gig economy?

Kevin: As you can tell from the previous question, documenting each of the prongs of the ABC test is going to take a lot of work. With this recent significant development in case law, contractors and freelancers might want to take a moment to do some introspection regarding their status, and decide whether they want to either: (1) reinforce their status as independent contractors; or (2) negotiate to be reclassified as employees. This would, however, be more of a business decision rather than a legal one.

Yaya: In my mind, the key questions for contractors and freelancers are:

(1) What kind of status do I want? Do I want to remain outside of the organization as an independent contractor, or would I prefer to be an employee?

(2) Should I approach my employer to discuss what my options are?

(3) What is the best way for me to lay out the facts for consideration?

Kevin: I think those are certainly the right questions to keep in mind. After weighing those questions, it’d be a good idea to speak with an attorney to discuss the situation with their specific facts in mind.

Yaya: How about companies that want to provide a platform, that essentially matches independent contractors with projects and short-term work arrangements sourced from companies and individuals?

Kevin: In my view, the main focus would be to ensure that users of the platform maintain a clear separation in their minds between the platform business and the vendors setting up shop on the platform. In other words, be more like craigslist, Etsy, or Patreon, and less like some of the higher profile ride‑hailing apps. This way, there’s a stronger argument that the platform just provides a logistics backbone for independent merchants to run their own businesses, rather than a system where the platform business hires workers to perform services for the platform.

Yaya: How about consultants that are doing work as independent advisors/consultants, and who wish to stay independent rather than becoming employees?

Kevin: The major prong to worry about here would probably be part B, which requires the services performed to be outside of the hiring entity’s usual course of business. As such, consultants who would prefer to maintain their independent contractor status should perform and market some kind of specialized expertise that the hiring entity otherwise wouldn’t have in-house. This might require some contractors to pick up additional skillsets and may involve pivoting their value proposition to highlight those specialized services.

Yaya: Given how uncertain the environment is and the lawsuits that may emerge, how should these groups think about moving forward with how they conduct their business? What risks should they think about managing?

Kevin: Employers should reach out to legal counsel to analyze the facts of their specific hiring arrangements, and make adjustments, if necessary. Before Dynamex, the question of worker classification in California mostly involved examining the degree of control the employer has over the worker. Now, though, more of the analysis will turn on what services can be reasonably viewed as “outside” of the hiring business, and what facts indicate that the worker has an independently established business. As more lawsuits go through the court system, we’ll have a better idea of each of those prongs. Based on the cases that Dynamex cited, however, we do have some data points on how a court would rule in certain scenarios: