California’s New Killer Bee: How Should Businesses Deal with Part B of California’s New Independent Contractor Test?

California ABC test Dynamex Killer Part BAccording to pestworld.org, Africanized honey bees have been known to chase people for more than a quarter mile once they get excited and aggressive. This is why they earned the nickname “killer bee.”

In its recent Dynamex decision, the California Supreme has introduced its own Killer B into California wage and hour law. This new Killer B could make plaintiffs’ lawyers excited and aggressive, chasing down businesses that use independent contractors and filing lawsuits alleging they are really employees. Those lawsuits could really sting!

Today we look at two questions: What is the new Killer Part B, and what do businesses need to know about it?

What’s the Issue?

Several states now use ABC Tests to determine whether a worker is an employee or independent contractor, at least under certain state laws. California joined the party with its 4/30/18 Supreme Court decision (Dynamex), adopting an ABC Test to determine who is an employee under most of California’s wage and hour laws.

Part B of the new California test can be difficult to meet. To be a true independent contractor, the worker must be performing work that is outside the hiring party’s “usual course of business.” We’ll call this a Strict ABC Test.

Some states have a more forgiving version of an ABC Test, allowing Part B to be satisfied if the worker performs the services either outside the usual scope of business or off of the hiring party’s premises. New Jersey, Illinois, and Connecticut use the more forgiving test. We’ll call that version the Standard ABC Test.

What’s the Concern with Part B in California’s New Test?

Part B can be hard to meet.  Lots of workers who are otherwise independent contractors will be considered employees because of Part B — especially under a California-style Strict ABC Test. If the type of services being provided are within the hiring party’s “usual course of business,” the worker must be treated as an employee under California’s wage orders.

Although this Strict ABC Test is new to California employers, it’s not new to multi-state employers. Massachusetts has been using a Strict ABC Test for its wage and hour laws since 2004, when it passed the Massachusetts Independent Contractor Law. In 2008, the Massachusetts Attorney General’s Office issued an advisory memo on its interpretation of the law, especially Part B.

What Can We Learn From Massachusetts?

The key to success under Part B is establishing that the contractor’s services are outside of the “usual course” of your business. That means the contractor does something that your business doesn’t do.

Companies should consider taking steps to define more precisely its “usual business,” and then memorialize that in multiple ways — internally, externally (website: About Us page?), and contractually in agreements with independent contractors.  Keep in mind the importance of differentiating between the scope of what your business does and the scope of what the independent contractor will be doing.  If you want to satisfy Part B, these things should be different.

You may need to define the scope of your services more narrowly. For example, if your business sells appliances but retains independent contractors to install them, you might take steps to define the scope of your business as “selling appliances but not installing them.” Consider adding language to your contracts, website, and other documents to make this distinction clear.

This is just one of many strategies that businesses in California and Massachusetts should be prepared to implement. Being proactive is the key to avoiding claims of independent contractor misclassification. Evaluate and modify your independent contractor relationships and contracts now, not after you have been sued.

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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What is California’s new ABC Test, and What Does It Mean for Businesses?

Dynamex ABC test california

What just happened?

Last week, we reported here on the California Supreme Court’s Dynamex decision. Today’s post takes a deeper dive.

In Dynamex, the California Supreme Court adopted one of the strictest tests in the nation for determining whether a worker is an employee or an independent contractor. The new test is used to determine whether a worker is an “employee” under California’s Industrial Wage Commission (IWC) wage orders. The wage orders require “employees” to be paid minimum wage and overtime, and to receive meal and rest breaks (unless exempt). Under this new test, a lot of independent contractors might now be “employees.”

The new test is an ABC Test. Unlike the balancing tests that start with the scales set equally, the new Dynamex ABC Test begins with the presumption that any worker performing services for your business is your employee. Guilty until proven innocent.

To overcome that presumption, the business must meet all three prongs of the new ABC Test. To prove that the worker is an independent contractor (and that the California wage orders do not apply), the business must be able to show:

(A) 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) the worker performs work that is outside the usual course of the hiring entity’s business, and
(C) the worker is customarily engaged in an independently established trade, occupation, or business.

If the business fails to meet all three prongs of this test, the worker is an employee for purposes of the wage orders. Case closed. Done deal. The other factors don’t even matter.

What does that mean? You must provide the worker a minimum wage, overtime, and meal and rest breaks (subject to exemptions, if applicable). It doesn’t matter that you have an Independent Contractor Agreement, and it doesn’t matter if the worker agrees to be an independent contractor status. (Here’s why.)

What was the basis for the California Supreme Court’s decision?

The Court’s decision was based on its analysis of the definition of “employ” under the IWC wage orders. The Court concluded that this definition was intended to cover a broader range of relationships than common law employer-employee relationships.

The wage orders define employ as “to engage, suffer, or permit to work.” This language originated in 1916, with the passage of state laws designed to prevent the exploitation of child laborers. The idea was that if you allow children to work for you, you are going to follow certain legal requirements. To prevent funny business, an intentionally broad definition of “employ” was used.

Those familiar with the federal Fair Labor Standards Act (FLSA) will recall that it too uses a broader definition of “employ” than most other federal laws. The FLSA definition of employ is “to suffer or permit to work.” That sure sounds a lot like the California definition, so shouldn’t California just apply the same Economic Realities Test as used to determine whether someone is an employee under the FLSA? Oh, my dear sweet naive friend, that would be too simple. And California doesn’t like simple.

The California Supreme Court went out of its way to point out that California came up with its language first and that it never intended to follow the FLSA test. Really, it says that. So there.

In Dynamex, the California Supreme Court concluded that where the definition of “employ” is “to engage, suffer, or permit to work,” the intent is to cover a broader range of individuals than common law employees and, from now on, the way to determine whether someone is an “employee” under the “engage, suffer, or permit to work” standard is to apply the new ABC Test. The IWC wage orders use this broad definition, and so the wage orders will now apply to any relationship where an individual provides services, unless all three prongs of the ABC Test are met.

But why change now?

If you are asking yourself why the test would change now — when that same definition has been in place for 102 years, when there has been no new law passed by the California legislature, and when no new regulations have been enacted — the answer is what you tell your kids when you’re too tired to explain why: Because I said so.

Really. The Court just said so. Nothing in the law has changed. The new, strict ABC Test did not come from a new law. It came from Massachusetts. Thank you, Massachusetts. Next time just send lobster rolls.

What about the other wacky California employment laws?

Most California employment laws use a more traditional definition of employee, not the broad “engage, suffer, or permit to work” definition. Under these other laws, therefore, the test for determining whether someone is an employee is (we think) unchanged. For the most part, the S.G. Borello test should continue to apply.

The S.G. Borello test stems from a 1989 California Supreme Court decision and is a hybrid Right to Control/Economic Realities balancing test.

Under S.G. Borello, the primary question is whether the hiring party retains the right to control the worker, both as to the work done and the manner and means in which it is performed. If yes, the worker is an employee. If it is unclear, then secondary factors are considered.

Secondary factors include:

1. Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
2. Whether or not the work is a part of the regular business of the principal or alleged employer;
3. Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
4. The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
5. Whether the service rendered requires a special skill;
6. The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
7. The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
8. The length of time for which the services are to be performed;
9. The degree of permanence of the working relationship;
10. The method of payment, whether by time or by the job; and
11. Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.

The court or agency then mixes all of these factors into a witch’s cauldron, blends them together, sprinkles in a pinch of eye of newt, waits for the smoke to clear, and then declares that, based on an analysis of the multiple factors, the worker must be an … (insert answer here). The S.G. Borello test is a balancing test, subject to interpretation. It’s gray.

California does have some other strict tests. The Dynamex ABC Test is not the only one. For example, strict tests apply in the construction industry and for the performance of work where a license is required but not obtained. Under those scenarios, like under IWC wage orders, it’s much harder to maintain independent contractor status than it is under a law that applies the S.G. Borello test.

What about federal laws? Do those still apply too?

Hahahahahahaha! You bet they do! Employers in California are still required to follow the FLSA, which determines whether someone is an employee by using an Economic Realities Test. Yes, lucky California business owners, this means your worker could be an employee under the strict ABC Test imposed by Dynamex and therefore subject to California minimum wage and overtime rules; but, at the same time, the same worker might be a legitimate independent contractor under the Economic Realities Test and therefore not subject to federal minimum wage and overtime law. Well that’s confusing.

Right to Control Tests govern the determination of whether someone is an employee under federal tax law, anti-discrimination law, and employee benefits law. As we discussed here, it’s certainly possible to be an employee under one law but an independent contractor under another law.

With the introduction of the strict Dynamex ABC Test, that will happen more often, ensuring full employment for lawyers like me.

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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California’s Top Court Creates New Test for Independent Contractor vs. Employee, Re-Interprets 102-Year Old Definition

horse race dynamexA three-way horse race can be exciting. As the finish line gets closer, each horse seems to dig deeper and find a little extra something to try to pull ahead. (Or gets whipped. Whatever. Stay with me here.)

It’s been a nail-biter over the past several years, with California, New Jersey, and Massachusetts competing to see which state could create the most difficult test for maintaining independent contractor status in wage and hour cases. For years, courts have used an Economic Realities balancing test for determining Independent Contractor vs. Employee status under federal wage and hour law. Most states apply a variant of that test or apply a Right to Control Test for determining Who Is My Employee? under their wage and hour laws.

In 2004, however, the Plymouth Rockers surged ahead, passing a law that used an ABC Test to determine whether someone is an employee or an independent contractor under Massachusetts’ minimum wage and overtime laws. ABC Tests make it harder to prove that a worker is truly an independent contractor (and not an employee), as we’ll see in more detail below. In 2015, the Home of Bruce Springsteen pushed forward, with the New Jersey Supreme Court requiring businesses to Prove It All Night and adopting an ABC Test for its state wage and hour laws.

Poor California was left behind. (No Surrender?) The state that birthed the Eagles and Hotel California did not rewrite its wage and hour laws and did not adopt an ABC Test. Finding no help from the legislature, the California Supreme Court took it upon itself April 30th to whip the Golden State forward, creating a new ABC Test in its 82-page Dynamex decision.

Let’s be clear about what just happened:

  • There’s no new law.
  • There’s no new regulation.
  • There’s no new executive order.

In fact, the definition of “employ” that this decision is based upon has been the same since Year 4 of the Woodrow Wilson presidency.

But now, despite none of those things changing, there’s a new test — at least for wage and hour claims that are covered under California IWC wage orders.

An ABC Test sets a higher bar than a Right to Control Test or an Economic Realities Test. It also sets a higher bar than California’s S.G. Borello test, which is a hybrid Right to Control/Economic Realities Test that has been in place since 1989.

California’s new ABC Test starts with the presumption that, for claims covered under California wage orders, every worker is an employee. Then, to prove otherwise, the business retaining that worker must prove (all 3):

(A) 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) the worker performs work that is outside the usual course of the hiring entity’s business, and 

(C) the worker is customarily engaged in an independently established trade, occupation, or business.

Fail just one part, and the worker is an employee under California wage and hour law. This new test is even stricter than most other states’ ABC Tests, which usually include two ways that Part B can be satisfied.

The new Dynamex test applies only to claims brought under California wage orders. These claims generally include minimum wage, overtime, and meal and rest break claims. This test does not apply to claims such as failure to reimburse expenses or failure to provide employee benefits.

Good luck out there!

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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New California Law Aims to Punish Contractors for Wage Violations They Did Not Commit. Huh?

EA9758A9-CA27-4BE3-B11B-53338CF1CEB1

Suppose you are a general contractor, hired to erect a monument to honor Carlos Santana’s monument-worthy performance of the national anthem during last year’s NBA Finals. Because the monument will be so tall (to house the many awards he should win for it), you need to hire subcontractors. Suppose the subcontractors cheat their employees, though, and don’t pay them a proper wage.

Under a new California law, the general contractor is strictly liable for the sub’s wage violations.

There’s no balancing test. No Right to Control Test. No joint employment finding needed. It’s strict liability. Call it the Jerry Brown corollary to Colin Powell’s Pottery Barn Rule. Someone else breaks it, you own it.

I hear you: “Not fair!” But as we all know, fair is not a required feature element of employment law in California. (Fair may still be an element of due process, however, for those who may seek to challenge the constitutionality of this law.)

The new law, cleverly titled “Section 218.7,” took effect January 1, 2018.

To try to protect themselves, contractors may require their subs to show proof of payment by the subs to its employees. They may also tell noncompliant subs, “you’ve got to change your evil ways, baby, before I start loving you.” But most contractors probably won’t say that.

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Python vs. Boa: Does the GrubHub Misclassification Ruling Really Matter? (Don’t Believe the Hype!)

Python vs boa - independentr contractor misclassification and grubhubPythons and boa constrictors usually do not fight each other. At least that’s what I learned in herpetology school. The reason they don’t fight each other is that there’s too much risk. The boa risks getting bitten by the python’s lethal fangs. The python risks being constricted to death because that’s how constrictors work.

For roughly the same reason, independent contractor vs. employee disputes rarely go to trial. There’s too much to lose. A company that relies on independent contractors for its business model cannot afford a ruling that all of its contractors are really employees. That’s why these cases almost always settle.

The GrubHub case, however, Continue reading

Bad News for Businesses: California May Rewrite Test for Independent Contractor vs. Employee

Shark california independent contractor misclassification

California businesses already have to cope with the threat of earthquakes, wildfires, Sharknados, and the craziest employment laws in all the land. The California Supreme Court may be about to make things even harder for businesses that use independent contractors.

For years, disputes over whether someone is an independent contractor or employee under California wage and hour law have been analyzed under the test used in S.G. Borello & Sons, which is a hybrid test combining elements of the Right to Control Test with elements of the Economic Realities Test. It is a multi-factor balancing test.

That may be about to change.

[Note 4/30/18: It did change. Read more here.]

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Update: Uber’s Misclassification Cases, Arbitration, and the Supreme Court

Independent contractor vs employee Uber misclassification lawsuit arbitration agreements IMG_1111Remember the children’s game called Red Light, Green Light? One ambitious youngster is selected as the traffic cop, who randomly shouts “red light” or “green light,” requiring all the children to run and stop and start in short bursts that would cause an adult human to tear an ACL.

That’s essentially what’s happening in the big Uber misclassification case that has been pending in California since 2014. The case is called O’Connor v. Uber Technologies and is being overseen by traffic cop / federal judge Edward Chen in San Francisco. If anyone ever gets to the finish line, it will eventually be determined whether Uber drivers are properly classified as independent contractors, rather than employees.

Continue reading