A Rose By Any Other Name...
Q: Independent Contractor or Employee?
A: Probably Employee as of 1/1/20, even if both Employer and Worker prefer Independent Contractor.
Q: Exempt or Non-Exempt?
A: Depends on Job Duties more than Job Title.
On September 18, Governor Newson signed AB 5 into law. This legislation, which takes effect on 1/1/20 is probably the most significant legal development for CA employers this year effecting thousands of workers who were previously identified as Independent Contractors and will no longer fall into that legal category and are now construed as Employees. AB 5 basically applies the 3 part test for Independent Contractor status that was implemented by the CA Supreme Court last year in the Dynamex case. Prior to AB 5, that Court Decision applied only to Wage Order disputes (minimum wage, over time, etc.) AB 5 adopts the same 3 part test used by the Court, but applies it to all areas of CA employment law, including payroll taxes and mandatory workers’ compensation coverage.
There were major lobbying efforts in support and opposition to this legislation. Organized Labor predictably supported, arguing it will entitle workers to the regular benefits of Employee status, including minimum wage, over time pay, workers’ compensation coverage and group health insurance. Business interests opposed it and predicted the proposed changes would force many of them to abandon CA, and all the workers that the law was supposed to protect. There was also no clear preference among the effected workers as a group, with many preferring the Independent Contractor freedom of work schedules and performing services for various companies at the same time (Uber and Lyft) and many arguing they had all the responsibilities of regular employment, without the benefits. Some industry groups did a better job with lobbying efforts than others, with several excluded industries and professions including Doctors, Lawyers, Dentists, Architects, Accountants, Realtors, Marketers, Investment Advisors and Broker Dealers. Other industries have conditional exclusion such as Barbers, Stylists, Cosmetologists and Manicurists who are exempt, but only if they set their own rates, schedule their own appointments and are paid directly by their clients.
For better or worse, like it or not, AB 5 is now the law and beginning Jan. 1st, it goes into effect. For employers that don’t utilize Independent Contractors as part, or all of their Labor force, nothing should change and the Law may actually be a positive development for those that have to compete with companies that have used Independent Contractors as a substitute for Employees to reduce their operating expenses, and may have enjoyed a market advantage. (Yellow Cab v Uber). For employers that are using Independent Contractors, those relationships now have to be re-evaluated using the 3 Part ABC Test introduced by the CA Supreme Court last year in the Dynamex Decision and now adopted by the Legislature and Governor in AB 5.
The ABC Test - The assumption will now be that a Worker is an Employee and it is the Employer’s obligation to prove otherwise by showing legitimate Independent Contractor status, which requires ALL of the following apply to that individual:
A. That the Worker is free from the control 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.
An employer, that isn’t specifically exempted from AB 5, and can’t establish all 3 requirements under the ABC Test apply to Workers which are not treated legally as Employees, needs to understand the potential legal liability if those working relationships continue without converting to Employee status. Uber has reportedly taken the position they will ignore the new law and litigate all individual employment law claims by their CA drivers separately as they receive them, because the alternative for them would be to cease operating in CA.
However, for Employers that are only doing business in CA and don’t have a Uber size legal defense budget, it is important to know there are countless ways to find themselves in Court and in trouble for failure to correctly classify Workers as Employees, even if the Workers prefer to be Independent Contractors and haven’t initiated the legal action by choice. One example would be a Worker who has a serious work related injury requiring a hospitalization. CA OSHA, the Workers’ Compensation Appeals Board and the Hospital wont defer to the Workers’ Independent Contractor title when asking for the employer’s WC Coverage information. In CA we have the Private Attorney General Act, which allows a private attorney with one disgruntled client, to sue an employer on behalf of the CA Labor Commissioner for all Labor Code penalties for all the covered employees, even if those employees don’t want to be involved. Those are just 2 examples out of hundreds.
On a final note, a detailed legal review of the very limited potential categories of “Exempt” employee status for purposes of the application of overtime/meal and rest break wage and hour obligations, will have to wait for another Newsletter edition. However, for Employers implementing changes in response to SB 5, which include converting “Independent Contractor” workers to “Employee” workers, it is important to carefully review the actual short list of “Exempt” categories, including the specific requirements to qualify for each one.
The bottom line is that labels such as Independent Contractor/Consultant/Exempt, have no legal status unless the specific applicable legal conditions support that label, even when the Employer and Worker prefer, and have agreed otherwise.
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