California Independent Contractor Law Update

California Independent Contractor Law Update. 

New Law Follows Prior Court Ruling Favoring Employees and Opposing Misclassification.

Summary:

California’s Governor signed into law AB 5 which goes into effect on January 1, 2020 and adds the ABC test to the California Labor Code. This is another important step in California’s fight to protect workers’ pay, overtime rights and benefits from loss due to misclassification of employees as independent contractors.

The new law “will help reduce worker misclassification — workers being wrongly classified as ‘independent contractors’ rather than employees, which erodes basic worker protections like the minimum wage, paid sick days and health insurance benefits” Gov. Newsom

The more employee favorable ABC test has, however, been the legal test for determining independent contractor versus employee status in California since the Supreme Court’s landmark Dynamex decision in April 2018, the details of which are discussed below – including the impact on which workers are entitled to overtime pay in California.

Under the ABC test, businesses that treat workers as independent contractors must show that the workers:

(A) are free from control and direction by the hiring company;

(B) perform work outside the usual course of business of the hiring entity; and

(C) are independently established in that trade, occupation, or business.

A true independent contractor is someone who runs their own separate business, sets their own rates, builds a customer base, and takes on the risk of business failure. The vast majority of workers in our country are not running their own businesses – no matter what label or classification is assigned to them.

Under the new law, most, but not all types of workers are covered.  Those exempted from the strict new independent contractor rules include doctors, lawyers, accountants, engineers, architects, real estate agents, travel agents, and investment advisors.  Salespeople are also exempt, so long as their compensation is based on actual sales rather than wholesale purchases or referrals.

For businesses using contract labor for marketing, human resources, graphic design, freelance photography, writing and editing, a six-part test can be used that requires independent contractors:

  1. Maintain a separate business location (which can be their home);
  2. Have a business license in addition to any required professional licenses;
  3. Have the ability to set or negotiate their own rates;
  4. Set their own hours (other than project completion deadlines)
  5. Customarily engage in the same kind of work with another entity or holds themselves out to other potential customers for the same kind of work; and
  6. Customarily and regularly exercises discretion and independent judgment in the work.

The new law also applies the ABC test to more types of claims that commonly arise when employees are misclassified as independent contractors, including claims for  reimbursement of business expenses, waiting time penalties and civil penalties under the Private Attorneys General Act (PAGA) for violations of the Labor Code and wage orders.

What are the differences between the labor law rights of an employee and a contract worker?

  • An employee who works overtime is entitled to either time and a-half or double time, unless their job is “exempt”; a non-employee has no rights to overtime pay, regardless of their job duties
  • An employee who is injured on the job has the right to workers’ compensation; a non-employee is on her own
  • An employer pays into Social Security, contributing to an employee’s secure retirement; 1099 workers finance their own retirement.
  • An employee who is subject to sexual harassment on the job is protected by federal laws against discrimination; a contractor is not.

In addition to California, Massachusetts, New Jersey, and Vermont currently use an ABC test to determine independent contractor versus employee status under their wage and hour laws.

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California Supreme Court’s Dynamex decision makes it easier for workers to prove that they should be classified and paid as employees instead of independent contractors. The big difference between the two – employees must be paid overtime while independent contractors do not.

This case involved a company that decided to save on labor costs by changing its workers classification from employees to independent contractors.  The workers’ job duties stayed essentially the same, but as independent contractors they did not receive overtime pay or other employee benefits.  The California Supreme Court decided that a relatively simple 3 part test should be used when deciding if a worker is an employee or an independent contractor.  This decision makes it more difficult for California employers to misclassify workers as independent contractors by starting out with the presumption that a worker is an employee (and therefore, entitled to overtime pay and meal and rest breaks).  

Any worker in California who has been treated as an independent contractor and, as a result, not paid overtime for working more that 8 hours per day or 40 hours per week, should take a close look at this issue.  Workers who have been improperly treated as independent contractors are entitled to recover back pay for unpaid overtime wages they would have received if properly classified as employees.

“the misclassification of workers as independent contractors rather than employees is a very serious problem, depriving…millions of workers of the labor law protections to which they are entitled.”

The California Supreme Court took aim at the exploding “gig economy” and recent trend of hiring workers as independent contractors by ruling against the employer (Dynamex) and in favor of the employees by adopting a more simple test that presumes workers are employees and, therefore, entitled to overtime pay and meal and rest breaks.  The court decided that the label used by companies does not matter – only if a company meets each part of an “ABC” test will a worker be legally considered an independent contractor. 

The ABCs of the test are:

(A) The worker is free from the type and degree of control and direction the hiring entity typically exercises over its employees; and

(B) The worker performs work outside the scope of the hiring entity’s business, and whose work therefore would not ordinarily be viewed by others as working in the hiring entity’s business; and

(C) The worker is customarily engaged in an independently established trade, occupation, or business, taking such steps as incorporating his business, getting a business or trade license or advertising. A hiring entity does not satisfy part C of the test simply by showing that it does not prohibit or prevent a worker from engaging in such an independent business.

All 3 parts of the test must be met to prove a worker is actually an independent contractor.  If any one element is not satisfied, the worker may not legally be treated as an independent contractor and will be legally recognized as an employee…and employees in California are entitled to benefits that include overtime pay, meal breaks and rest breaks.

Avoiding the payment of time and a-half for hours worked over 8 per day and 40 per week is commonly the largest and most desired benefit of misclassification, and the labor cost savings add up very quickly.  Misclassified employees in California are commonly cheated out of their overtime pay by: 

  • Paying straight time for overtime, instead of time and a-half to hourly workers;
  • Using a Day Rate pay scheme that does not pay a premium for overtime hours each week; and
  • Working under a Piece Rate or Per Job scheme that does not pay a premium for overtime hours each week.

“When a worker has not independently decided to engage in an independently established business but instead is simply designated an independent contractor … there is a substantial risk that the hiring business is attempting to evade the demands of an applicable wage order through misclassification”

Independent contractor misclassification is common in all types of industries, however, it frequently impacts workers in the following types of jobs/businesses:

  • Oil / Gas / Energy
  • Construction – Industrial and Residential
  • Welders
  • Inspectors
  • Technology / IT
  • Trucking / Transportation / Delivery
  • Home healthcare
  • Disaster Recovery and Clean-up
  • Various jobs through Staffing Companies
  • Service Technicians and Installers

For more information and to find out if you may be owed back pay due to being misclassified as an independent contractor, contact our lawyers who represent workers, not companies, in overtime pay claims.  Call or submit your information using our convenient Case Evaluation form for a FREE and CONFIDENTIAL review of your circumstances.

Fill out our quick case evaluation form for a free and confidential review of your situation.