California Businesses May Need Emotional Support Clown When New Independent Contractor Law Takes Effect

Emotional support clown independent contractor misclassification

An Auckland, New Zealand man sensed he was about to fired from his job in the ad industry. His employer scheduled a meeting and said he could bring someone with him for emotional support.

He brought a clown.

As the employer provided the man with his separation papers, the clown made balloon animals — a poodle and a unicorn — to try to lighten the mood. The clown also mimed crying as the employer explained the termination.

Afterward, the man described the performance of his emotional support clown as “overall supportive” but “sort of noisy.”

California businesses may want to hire their own emotional support clowns as they try to decide how to respond to Assembly Bill 5 (AB 5), which has passed both houses and now awaits Governor Newsom’s signature to become law.

AB 5 makes it harder to classify workers in California as independent contractors.  Once it takes effect, it will instantly convert many thousands of independent contractors into employees.

Here’s how. AB 5 codifies the ABC Test invented by the California Supreme Court in the Dynamex case and then extends it.  In April 2018, the California Supreme Court ruled that a strict ABC Test would be used for determining whether someone is an independent contractor or an employee under California’s Industrial Wage Orders, which cover minimum wage, overtime, meal and rest breaks, and a few other wage-related subjects.

Under AB 5, the Dynamex ABC Test will also be used to determine whether someone is an employee under all portions of the California Labor Code and the Unemployment Insurance Code.  That means independent contractors in California will be presumed to be employees of the entity for which they perform services under these laws, unless the business can prove all three of the ABC Test factors below:

A) The person 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;

B) The person performs work that is outside the usual course of the hiring entity’s business; and

C) The person is customarily engaged in in independently established trade, occupation or business of the same nature as that involved in the work performed.

As discussed here, Part B of the test is the hardest to meet.

Unless all three factors of the test are satisfied, the workers will be considered employees under California law, and all of the following state law requirements will apply:

  • Minimum wage
  • Overtime, if not exempt, including daily overtime
  • Meal and rest breaks
  • Reimbursement of expenses
  • Paid sick leave
  • Paid family leave
  • Various notice, poster, and wage statement requirements
  • Timekeeping record requirements
  • Unemployment coverage
  • Workers compensation coverage
  • Paycheck timing requirements
  • On-call, call-back, and standby pay requirements
  • Travel time payment requirements
  • Final paycheck requirements
  • Commission rules

This is not intended to be a complete list of all California laws that apply to employees, but these are some of the most likely areas where businesses would find themselves to be in a state of noncompliance if their independent contractors are deemed to be employees under AB 5.

There are a number of exemptions to the bill, but they are narrowly crafted.  Barbers and estheticians, for example, are not affected.

If signed, the law will take effect January 1, 2020, although some provisions may be applied retroactively.

This bad news leads to the obvious question you astute readers will ask: So what are my options if I use independent contractors in California?

I am putting the finishing touches on The Playbook: Now That California Has Passed AB 5, What Are the Options for Businesses Using Independent Contractors?

The Playbook will be available at no cost and will be released as a BakerHostetler Client Alert. I will post a link here, once it is available.

In the meantime, let me know if you’d like more information about how AB 5 might affect your business. If you can’t reach me, I’m probably on the phone, trying to hire my own emotional support clown.

© 2019 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Sperm Oil Legal Alert: Can You Sue under the Tax Code for Independent Contractor Misclassification?

Sue tax code independent contractor misclassification

When laws are well-written, they’re really specific so everybody knows what you can and cannot do. For example, Title 21, Section 173.275(c) makes it a federal crime to use more hydrogenated sperm oil in food than necessary to accomplish the intended lubricating effect of the sperm oil. (Thanks @CrimeADay!)

Some laws, on the other hand, leave room for interpretation. That’s when lawyers can get creative.

A drapery hanger in Maryland filed a lawsuit alleging that he was misclassified as an independent contractor and should have been paid overtime like an employee. He sued under the usual federal and state laws, but he added a bit of creativity.

The Internal Revenue Code includes a section allowing someone to sue if an evildoer “files a fraudulent information return with respect to payments purported to be made to any other person.” That’s 26 USC 7434, for those keeping score at home. And USC refers to the United States Code, not OJ Simpson’s alma mater.

The drapery hanger included this claim in his lawsuit, alleging that the sole proprietorship that allegedly owed him overtime pay also violated this law by filing 1099s instead of W-2s.

Points will be awarded here for creativity, but those points cannot be used in court. Federal courts don’t take points. (This was not addressed in law school.) All points awarded may be applied to future discounts at your local gas station. No purchase necessary. Void where prohibited.

The court said, nice try but no. This section of the Code refers to the filing of fraudulent amounts of pay, not filing the wrong form.

Had the decision gone the other way, a claim under this section of the Code could be tacked onto just about every independent contractor misclassification lawsuit. And we don’t need that hassle. There are already enough laws that cover misclassification. And sperm oil.

© 2019 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Employees Say They’ve Been Robbed! NLRB Says Independent Contractor Misclassification Does NOT Violate the National Labor Relations Act

Burglar roomba misclassification

Sheriff’s deputies in Washington County, Oregon, responded with guns drawn, expecting they were responding to a burglary in progress. A woman had called 911, saying that someone had broken into her house and locked themselves in the bathroom. She could hear rustling noises from behind the bathroom door, even though she knew she hadn’t allowed anyone into her home.

The officers entered the home and heard it too. They demanded that the suspect come out of the bathroom, hands raised. But no one responded. They busted open the door, ready to take down the suspected burglar by force.

What they found instead was a Roomba. The homeowner’s robotic vacuum cleaner had gotten stuck in the bathroom.

Calling the Roomba a burglar didnt make it a burglar, and calling in a suspected burglary did not make the woman a victim.

People make mistakes, and calling something the wrong thing can be an excusable mistake.

That’s essentially what the National Labor Relations Board ruled late last week, in a major pro-business decision.

In a case called Velox Express, The Board ruled that to misclassify a worker as an independent contractor — when the worker should have been an employee — is not a violation of the National Labor Relations Act (NLRA or the Act).

The Board reasoned that The Act prohibits interfering with employees’ Section 7 rights. Section 7 rights refer to employees’ right to engage in protected concerted activities, such as banding together to complain about their treatment. The Board said that by misclassifying employees as independent contractors, a company is merely stating a legal opinion about what the worker is. Telling workers they are contractors does not, by itself, interfere with their ability to organize or engage in protected concerted activity. If they’re really employees, they still can. It’s only if the company coerces or threatens the workers that the company interferes and then violates the Act.

The Board further reasoned that it’s hard sometimes to tell whether a worker is a contractor or an employee, and Congress did not intend to punish companies for making a mistake.

This decision will be blasted by worker advocates and, frankly, it’s surprising even to me.

The ALJ Decision That Led to This Ruling

We wrote about this case previously here, when an Administrative Law Judge made three important rulings.

First, the ALJ found that Velox exercised significant control over how its delivery drivers performed their work, which made them drivers under the NLRB’s Right to Control Test.

Second, the ALJ ruled that Velox violated Section 8(a)(1) of the Act when it discharged driver Jeannie Edge for raising group complaints that Velox exercised too much control over its drivers.  (In a somewhat ironic twist, Edge wanted to be an independent contractor but had perceived, correctly, that Velox was treating its drivers more like employees, even though it was calling them contractors. Edge wanted Velox to treat the drivers more hands-off, the way contractors would typically be treated.)

Third, the ALJ ruled that misclassifying an independent contractor was, by itself, a violation of the NLRA. The ALJ’s reasoning was that by misclassifying workers as independent contractors, the company was in effect telling the workers they had no rights under the NLRA, since that Act protects only employees, not independent contractors.

NLRB’s Decision

The case was appealed to the full Board, which agreed that (1) the Velox drivers were really employees under the common law Right to Control Test, and (2) Velox violated Section 8(a)(1) when it discharged Edge for engaging in protected concerted activity.

But the Board rejected Finding #3, ruling instead that misclassifying workers as independent contractors is, ho-hum, merely expressing a legal opinion. Section 8(c) of the Act says it’s not a violation to express an opinion.

The Board recognized that the outcome would be different if the company misclassified its workers as contractors for the purpose of interfering with employees’ Section 7 rights or to coerce them not to exercise those rights. But misclassification alone is not a violation of the NLRA.

So, Is Misclassification Now Lawful? Hey Man, Are You Gonna Shut Down the Blog?

No! and No! This decision says only that the act of misclassification is not an automatic violation of the NLRA. That’s just one law.

When a company misclassifies an employee as an independent contractor, every other law related to employees still applies. A company that misclassifies employees as contractors can still be violating tax law by not withholding from wages; can be held liable for violating wage and hour law by failing to pay a minimum wage or overtime or failing to provide meal and rest breaks; can still be in violation of state workers’ compensation and unemployment insurance law by failing to pay into those systems; can be in violation of the Family and Medical Leave Act by failing to offer the type of leave available to employees; and can still find itself in violation of every other law that grants rights to employees when the company does not grant those rights.

Misclassification can still violate the NLRA too, if a company engages in misclassification for the purpose of interfering with employees’ rights.

The game is still very much on.

So What Impact Will This Decision Have?

Probably not much. It sounds like a doozy, and it is; but as a practical matter, it probably doesn’t change a whole lot. Independent Contractor Misclassification still has significant legal consequences, and companies who misclassify workers as independent contractors when they should really be employees still face liability under a long list of employment, tax, and benefit laws. Violations of these laws continue to result in massive liabilities, often in the many millions of dollars.

This pro-business decision by the Board may result in fewer unfair labor practice disputes, but even that outcome seems unlikely. Disputes over employee vs. independent contractor status usually arise because there’s a real dispute over how a company is treating its workers, not merely because it used the wrong terminology. Any failure by a company to grant employees rights they are entitled to receive is still a violation of law, even if it’s no longer a violation of the NLRA merely to call an employee an independent contractor.

© 2019 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Why Don’t Companies Offer Healthcare Benefits to Independent Contractors?

 

I found this on buzzfeed, while doing academic research for this blog post.

In the business world, it’s not quite as funny when good intentions are misunderstood. Which is why companies generally can’t offer healthcare benefits to independent contractors. Even if they would like to, they can’t.

Good intentions would be misunderstood, and the effect of offering healthcare coverage to independent contractors would likely be that they are turned into employees.

Why?

The law limits who can sell health insurance coverage. You need a license. It’s the same reason I can’t work as an Aquatic Antifouling Paint Operator in New York State. If you want to commercially apply antifouling paints, which are pesticides, on vessel hulls, boat bottoms, or other other marine surfaces to inhibit the growth of aquatic organisms, you need an Aquatic Antifouling Paint Operator license. (Apply here.)

Companies that aren’t licensed to sell healthcare insurance can’t go around selling healthcare insurance. But there’s a narrow exception, which allows companies to offer healthcare insurance to its employees. The exception doesn’t extend to vendors, suppliers, or independent contractors. Only employees.

Some of the large rideshare app companies have advocated for legal reform that would allow them to offer more benefits to independent contractor drivers. But there’s not much they can do right now. Companies without a license to sell healthcare insurance can only offer healthcare insurance to its employees, not to independent contractors.

Some companies have begun to get creative in an effort to offer more benefits to independent contractor drivers. According to benefitsnews.com, some app companies are beginning to offer limited benefits, such as access to accident insurance, free online college courses, and professional certifications.

Some states, such as New York, have considered legislation that would expand the availability of benefits to independent contractors, but the current state of the law severely restricts what companies can do.

The legal problem for companies who want to offer more benefits to contractors is not just that they can’t sell healthcare insurance to non-employees. It’s also that the more benefits they offer to contractors, the more those contractors may start to resemble employees. Since U.S. law currently sees the Employee vs. Independent Contractor issue as binary — you can only be one or the other — companies who offer increased employee-like benefits to contractors run the risk that the contractors will be deemed their employees, which creates a whole big mess of other legal problems.

A company might wish to provide healthcare coverage to independent contractors, but the company’s good intentions would be misunderstood. Which is also why if you want a haircut and dye, you should just type it into your phone’s calendar instead of just telling Siri.

© 2019 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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How Do I Run a Background Check on an Independent Contractor?

How do i run a background check on an independent contractorAfter the events of this past weekend, I don’t have to say anything about the risks involved in allowing dangerous people onto your premises. Before retaining an independent contractor who will have access to your business’s facilities, people, or information, it makes sense to know who you are inviting into your house.

An employment-style background check is often appropriate, but there are a few important differences between background checks being run before hiring an employee and before engaging a non-employee contractor.  [We’re talking here about 1099 contractors, not staffing agency employees.]

If the background check is being run by a third party, then the federal Fair Credit Reporting Act (FCRA) is likely to apply. But the rules are different for pre-employment background checks and non-employment background checks.

For pre-employment background checks, certain disclosures must be made before the background check is obtained, and additional disclosures have to be made before you take an “adverse action” based on the result of the background check, such as revoking a conditional offer or not hiring someone. These additional requirements apply only for background checks being run “for employment purposes.”

Ok, Todd. These don’t sound too burdensome. Can’t I just follow the more burdensome pre-employment rules just to be safe?

Yes, sort of. But a few words of caution are in order.

First, your User Agreement with the background check company requires you to certify to the background check company the purposes for which you will be requesting background checks. Review your agreement to see whether you certified that you would only run background checks “for employment purposes.” 

Since this is not a background check being run “for employment purposes,” you need to have another permissible purpose under the FCRA. The law lists several alternatives. Two are likely to apply:  You may obtain a background check (1) “in accordance with the written instructions of the consumer” or (2) if you have “a legitimate business need for the information in connection with a business transaction that is initiated by the consumer.” Here, the “consumer” would be the individual contractor.

You may need to amend your agreement with the background check company before  you run any background checks on potential independent contractors. You never want independent contractors to be considered your employees.

Second, check the federal forms you give to the individual before you run the background check. You do not want to give an independent contractor a Disclosure form or an Authorization form that says your company will run a background check “for employment purposes.” Many generic forms include that phrase because it’s a term of art used in the FCRA. For background checks being run on independent contractors, you don’t want to have the contractor sign a document that can be used to argue you were creating an employment relationship, rather than an independent contractor relationship.

Finally, check the state law forms you are using. If your background check company supplied you with a suite of forms, those forms likely include various disclosures required under state laws. States with additional pre-employment background check requirements include California, Minnesota, New Jersey, New York, Oklahoma, and Washington State, among others. Almost all of the required state law disclosures, however, apply only to background checks being run “for employment purposes.” Be careful not to use forms with language that could be used to argue you were creating an employment relationship, rather than a contractor relationship.

Final thoughts:  Running a background check on an independent contractor can be a good idea and can bring you and your business some piece of mind. Be careful, though, that you don’t solve one problem by inadvertently creating another.

Background check pitfalls can be prevented if you use the correct forms and documents ahead of time. It’s not that hard to do this correctly, but it requires a some extra attention and care.

If you’d like more information, you can review two earlier blog posts I’ve written on this topic, here and here. Or feel free to contact me directly at tlebowitz@bakerlaw.com.

© 2019 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Do Over for California’s ABC Test? Retroactivity Issue is Headed Back to the State Supreme Court

Independent contractor ABC Test cow

“Placido Domingo’s pretty great, but I also love Pavarotti.”

In Hampshire, England, there is a veterinarian who sings opera to cows.

Now if your spidey-sense is as tingly as mine, you’ll immediately realize there is something wrong with this picture. It’s obvious, right? It should be an opera singer who sings opera to cows, not a veterinarian. Vet school does not include the proper classical training.

While this Hampshire vet has apparently not realized he is out of his lane, the Ninth Circuit Court of Appeals last week did acknowledge it was operating out of its lane in a major case involving independent contractors. The Ninth Circuit is withdrawing a major decision it released in May 2019 and sending that issue to the California Supreme Court instead.

In May, we wrote about the ruling by the federal Ninth Circuit Court of Appeals that’s being withdrawn. In that case, the Ninth Circuit ruled that California’s ABC Test (the Dynamex Test) for deciding the Independent Contractor vs. Employee question would apply retroactively. (You can read my seething critique of that ruling, Vazquez v. Jan-Pro, here.)

The Dynamex decision is the one in which the California Supreme Court made up an ABC Test as the new standard for determining whether someone is a contractor or an employee under California’s wage and hour laws (claims of overtime, minimum wage, meal and rest breaks, etc.). The ramifications are enormous for California businesses.

Now back to the May 2019 Vazquez ruling. In that case, the Ninth Circuit ruled that California businesses should have been applying the ABC Test that was made up in Dynamex, even though that test did not yet exist. Seems pretty unfair, doesn’t it? Very unfair.

Last week, the Ninth Circuit withdrew its ruling in the May 2019 Vazquez case. This is half good news, not all good news.

The Ninth Circuit didn’t concded that its May 2019 decision was wrong (even though it was, heh heh). Rather, the Ninth Circuit decided that — like a veterinarian singing opera to cows — it had been operating out of its lane. The Ninth Circuit now says that the California Supreme Court — not the federal Ninth Circuit Court of Appeals  —  should be the one to decide whether the ABC Test applies retroactively.

The California Supreme Court case is definitely one to watch. Industry groups from around the country are likely to weigh in. Many will file amicus briefs (non-party “friend of the court” memos) to try to persuade the court that retroactivity would be unfair and would have significant negative effects on California businesses and the state’s economy.

For now, the question of whether the Dynamex ABC Test applies retroactively is again unresolved. That means there is a period of a few years extending back from April 2018 in which nobody knows what the test is for determining whether someone was then an employee or an independent contractor under California’s wage and hour laws.

That’s important because the are a lot of lawsuits alleging that independent contractors are misclassified. Some have been decided, some have not. Could some cases that were already decided be reopened?

We’ll keep an eye on this case as it makes its way through the California Supreme Court. We’ll also be watching for new developments among bovine opera aficionados. I want to know whether the cows think this veterinarian singer is any good.

© 2019 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Will NY Lawmakers Create a New Class of “Dependent Contractors”? If So, It Could Be a Work of Art.

Horse no shadow - independent contractor misclassification - dependent contractor - Todd Lebowitz

This piece of art hung in the bedroom at the apartment I rented on my recent vacation in Paris. See the shadow of the dog? Yep. See the shadow of the horse? Yep. See the shadow of the rider?

Oops. I expected it to be there. Chalk up another win for bad art.

Art requires creativity and, sometimes, a different perspective. Things are not always the way we expect them to be. That can be due to oversight (such as with bad art) or due to creativity. New York lawmakers are looking at new ways to approach the Independent Contractor vs. Employee question, and under one recent proposal, lawmakers could get creative.

A proposed bill would create the status of dependent worker, allowing gig workers to form quasi-unions to negotiate fees and directing the state to hold public hearings exploring ways to provide other rights to gig workers, such as minimum wage and anti-discrimination protections.

The bill was withdrawn just before summer recess, but the question will be revisited in the next legislative session. 

Some worker groups say the bill does not go far enough. Many worker advocates would like to see a new law that presumes all gig workers to be employees, unless the hiring party can prove an exception. ABC Tests are one example of that type of law. Business groups seem more open to the proposal, recognizing that labor laws probably need to start recognizing a middle ground between employees and independent contractors. (You can read more about that movement here, in last week’s post.)

We’ll have to wait until the fall, when New York lawmakers return to Albany, to see how this plays out in New York. In the meantime, if anyone is looking for something fun to do during summer break, I know of at least one amateur French painter who could use some tutoring.

© 2019 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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