California Makes It Much Harder to Classify Workers as Independent Contractors
CALIFORNIA'S NEW TEST FOR INDEPENDENT CONTRACTOR STATUS
The April 30, 2018, ruling by the California Supreme Court confirming a change to the test used for classifying employees could have widespread effects spanning outside of California. Prior to this recent case, California, like many other states, used a multi-factor test for determining status between an employee and independent contractor by assessing the degree of control the employer had over the worker.
Thanks to California's ruling, that test has essentially been scrapped for a much shorter "ABC" test. The "ABC" test requires employers to establish three factors to show a worker is an independent contractor: "that the worker is free from the control and direction of the hirer in connection with the performance of such work; that the worker performs work that is outside the usual course of the hiring entity's business; and that the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity." Essentially a worker is considered an employee if he or she performs a job that is part of the "usual course" of the company's business.
CALIFORNIA TODAY - REST OF U.S. TOMORROW?
This decision is likely to throw chaos into the gig economy and those companies that rely heavily on independent contractors as a model for delivering services and goods.
While ride-sharing companies, like Uber or Lyft, have often been used as examples of employing drivers as independent contractors rather than employees, under this new test their business plans may be forced to change. They will not be alone. Even though these companies can argue they don't exert sufficient control over drivers in order to classify them as employees, one of the hurdles the new test presents is the difficulty of arguing that drivers aren't performing a task that is a standard feature of the ride-sharing business. While immediate changes to businesses may not occur, this test is gaining momentum across the country and has already been applied in other states, including Massachusetts and New Jersey. With California now following suit, it is likely only a matter of time before other states fall in line and employers will be faced with serious business decisions.
WHAT TO DO?
Certainly California employers should examine their use of independent contractors in light of this decision. But it should not be limited to California employers. Any employer who has not sought legal counsel and audited their employee classifications, including the use of independent contractors and classification of employees as exempt/non-exempt, assumes great legal risk. You are invited to contact your Thompson Coe attorney or myHRgenius@thompsoncoe.com to discuss these issues and options for auditing your workforce.
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