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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Is Joint Employment Illegal?

Is joint employment illegal? Buddha statue(Or, How is Joint Employment Like Tibetan Reincarnation?)

In Tibet, it is illegal to be reincarnated as a living Buddha unless “a majority of local religious believers and the monastery management organization” has requested the reincarnation. This is according to State Religious Affairs Bureau Order No. 5, issued in 2007, apparently to clamp down on rampant, uncontrolled reincarnations.

Joint employment is like Tibetan reincarnation in that both have lots of rules. But unlike Tibetan reincarnation, joint employment is not illegal.

Joint employment merely means that, in the eyes of the law, there are two employers. So far, no problem.

The problems arise if the primary employer doesn’t do what it’s supposed to do.

Consider a staffing agency scenario. The staffing agency is the primary employer. If the staffing agency’s employees are working at your company, taking direction from your supervisors, and working side-by-side with your employees, then the staffing agency workers are probably your joint employees.

The staffing agency is expected to pay its employees minimum wage, properly calculate their overtime, track their hours, etc. If they do all those things, no problem.

But if they don’t, that’s when joint employment becomes a problem. Even though your company has no control over the payroll processes of the staffing agency, your company can be held liable for their mistakes. That’s because under the Fair Labor Standards Act (FLSA), joint employers are both responsible for making sure that employees are properly paid.

The lesson here is to be careful about the companies you partner with for your staffing needs. If the agency is reliable, well-established, well-financed, and well-insured, then you should be in good shape. Fly-by-night operations that price their services at too-good-to-be-true discounts are a risk — not just because they might fail to provide you with quality employees, but because they might fail to properly pay those employees and then your company can be held responsible.

Be careful who you invite into your tent. Screen your staffing agencies. Impose contractual requirements that protect your business. Require adequate insurance. And do not ever permit any unauthorized reincarnations.

 

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

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Selling Hot Dogs: Why the DOL Thinks It’s 2008 Again

Dol wage and hour guidance hot dogs

The year 2008 doesn’t seem that long ago. Flo Rida was atop the Billboard charts, No Country for Old Men won the Oscar for Best Picture, and Episode 1 of the 2008 season of Celebrity Apprentice (titled, “Selling Hot Dogs” [yes, really]) featured the judging panel of Donald Trump, Donald Trump Jr., and Ivanka Trump. More on Episode 1 below.

The DOL must be longing for the good old days. Earlier this month, the Wage & Hour Division quietly withdrew its 2014 Fact Sheet advising businesses how to differentiate employees from independent contractors under the FLSA.

Instead, they reposted the 2008 version. In practical terms, there’s probably no real effect. The statute and the regulations that would govern the analysis haven’t changed between 2008 and 2014. But the 2014 version (cached copy here) also included some Obama-DOL commentary, advising that “most workers” are employees under the proper analysis. The old/new 2008 version doesn’t say that.

In any event, what businesses need to know is that courts apply an Economic Realities Test when deciding Who Is My Employee? under the FLSA.

The FLSA is the federal statute requiring non-exempt employees to be paid minimum wage and overtime. It does not apply to independent contractors, which is one reason why misclassification matters. If you thought your worker was properly classified as an independent contractor, then the minimum wage and overtime requirements did not apply. If the worker was misclassified and was really an employee, your business may be held liable for failing to pay minimum wage and overtime.

And for those of you who read all the way to the end of this post hoping to be rewarded with more information about the outcome of Episode 1: Selling Hot Dogs, there’s this from Wikipedia:

Winning team: Hydra, with total sales of $52,286.
Reasons for win: Hydra used their celebrity status to drastically up-sell the hot dogs and Gene Simmons used his contacts to put impressive numbers. Piers Morgan also came up with an idea whereby anyone who paid $100 or more for a hot dog would get to have their picture taken with one of the celebrities, encouraging passers-by to make more substantial donations.

Good job, Piers. You should be proud.

For more information on independent contractor issues and other labor and employment developments to watch in 2018, join me in Cincinnati on March 28 for the 2018 BakerHostetler Master Class on Labor Relations and Employment Law: A Time for Change. Attendance is complimentary, but advance registration is required. Please email me if you plan to attend, tlebowitz@bakerlaw.com, and list my name in your RSVP so I can be sure to look for you.

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

Despite New DOL, Independent Contractor Misclassification and Joint Employment Remain Risky

What effect of withdrawal of DOL memos

In June 2017, the DOL withdrew its Obama-era 2015 and 2016 informal guidance on joint employment and independent contractors. The memos covered federal wage and hour law (FLSA). Eight months later, what effect has that decision made?

Essentially none.

Remember, the 2015 and 2016 memos did not change the law on independent contractor misclassification or joint employment. Rather, the memos were an attempt by the Wage & Hour Administrator, David Weil, to summarize existing law – but with a pro-employee leaning. The memos selectively interpreted court decisions that supported Weil’s view of the world, i.e., that most workers are employees. When Weil left, the DOL said goodbye to his interpretations as well.

But … Continue reading

After the NLRB Ruling, Is Joint Employment Still a Concern?

What is joint employment - imageLast month in the Hy-Brand decision, the NLRB raised the bar for determining whether a business is a joint employer. So now what? Is joint employment still a concern for businesses?

To paraphrase Tina Fey paraphrasing Sarah Palin paraphrasing Margie in Fargo, Ya! You betcha!

While the recent NLRB decision dropped the alert to Def-Con 4 in labor relations, the joint employment landscape under wage and hour laws is getting worse for employers, not better, thanks to the Fourth Circuit Court of Appeals. Businesses should Continue reading

Joint Employment Tests Will Remain a Mess, Thanks to an Indecisive Supreme Court

Joint employment tests are messy FLSA

Is your business a joint employer?

This sounds like a straightforward question. Unfortunately, it’s not. The test for whether a business is a joint employer varies depending on which law is being considered and where the business is located.

Let’s focus on that last part, because it is pretty ridiculous. The federal law covering overtime and minimum wage requirements is the Fair Labor Standards Act (FLSA).  The FLSA is a federal law, so it should mean the same thing all around the country, right? Right. It should. But it doesn’t.

As we saw in this map, the test for joint employment under the FLSA varies depending on what state your business is located in.

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Free Bird! Dep’t of Labor Rewrites Test for Unpaid Internships

chicks-2965846_1920Lots of things are free in the world of music. There’s Free Bird (Lynyrd Skynyrd), Free Money (Patti Smith), and according to Dire Straits, you can get your money for nothin’ and your chicks for free.

For the most part, though, you’ve got to pay for your interns. Or do you?

On Friday, the DOL announced it was reversing its 2010 guidance on Internship Programs under the Fair Labor Standards Act. Since 2010, the DOL had been taking the position that unpaid interns are employees and must be paid unless each of six factors were present. Here’s the old DOL fact sheet and six-factor test.

The DOL has now changed course, after four U.S. Court of Appeals decisions rejected the DOL’s test as too strict. The DOL now opted for a balancing test. The balancing test asks whether the intern or the business is the “primary beneficiary” of the internship.

The DOL’s new guidance adopts the same balancing test recently favored by the courts.

Continue reading