MAJOR CHANGE IN CALIFORNIA LAW

                   Employees-Nearly Always                          Independent Contractors -Not so Much

BEWARE: Warning to all businesses, irrespective of size: small, medium and large, you are all now on notice that (1) you cannot have an inadvertent independent contractor relationship with a hired person; (2) your hired person who performs work within the scope of the company’s core business is an employee; (3) hired persons will be classified as employees, unless you can overcome that conclusion by answering “Yes” to each of three questions, all of which under most circumstances will not be possible; and (4) you must be able to prove that the hired person intends and desires to be an independent contractor as evidenced by the objective manifestations of the hired person which are consistent with such person being organized and operating as a separate business ( this is not a typo- to clarify: the hiring person (you) must prove that the hired person meets this test).

On April 30, 2018, in Dynamex Operations, West, Inc. v. Superior Court (“Dynamex”), the California Supreme Court (the “CSC”), in a unanimous decision, delivered one death blow to small business and another, which also may be fatal, for most other businesses in California whose management, lawyers and accountants have believed that those businesses were engaging independent contractors rather than employees to do the work those businesses required. There is no grandfathering language in the decision, so the conclusions reached by the CSC are applicable to hiring persons, and hired persons who (i) have a pre-existing independent contractor relationship and have treated it as such; (ii) have created an independent contractor relationship only recently; and (iii) who have not yet entered an independent contractor relationship with a hired person, but intend to do so now or in the future.

Yes. There is no doubt about it: the CSC adopted the “ABC” test previously adopted in certain other jurisdictions (such as New Jersey and Massachusetts) to bring order and certainty to the fray. In doing so, the CSC abandoned (or did it?) decades of looking at the purpose for the inquiry as to classification, the public good, the individual facts which culminated its 1989 decision in S.G. Borello & Sons, Inc. v. Department of Industrial Relations 48 Cal.3rd 341 (“Borello”).

SOME SIMPLE HYPOTHETICALS WITH BAD, UNCERTAIN AND DISAPPOINTING ANSWERS UNDER THE ABC TEST

Before struggling through all the analytical steps discussed below which may have to be taken in order assure that a classification decision under the ABC Test is as correct as it can be, below are some knee jerk reactions:

Facts: Assume the applicability of some form of social legislation the purpose of which is to directly or indirectly protect hired persons. In the absence of such legislation, assume there is some form of judicial or administrative precedent which is intended to apply to the social, health, benefit or welfare of persons doing business or living in California, for example: wage orders addressing working conditions, workers’ compensation, whistleblower protections, anti-retaliation actions, minimum wages, state tax issues, unemployment or other insurance protection, health benefits- you get the picture!

In such instances:

Can there be an unintentional independent contractor? No.

Can there be an independent contractor if a hiring person does not intend for the hired person to be such? No.

Can there be an independent contractor if the hired person does not intend to be such? No. The hired person will be an employee if such person answers No to any of the 3 ABC questions.

Can there be an independent contractor if the hiring person and the hired person intend for the hired person to be such? Maybe.

Why maybe? Because assuming those shared intentions by the hiring person and the hired person, the hiring person must answer Yes to all the ABC questions and in addition to answering Yes, the hiring person must prove that the worker has been and is customarily engaged in an independently established trade, occupation or business.

Is it now the case that to be considered an independent contractor, the hired person must have a history of being engaged in an independently established business? Yes. So, John only a few days ago completed his commercial driver’s license tests and has been hired today to act as a courier for the rest of the week by a delivery service. Under the ABC test can he be an independent contractor? No.

Can the delivery service treat John as an independent contractor? No: because the hiring person must be able to answer Yes to the 3 questions posed by A, B and C. John has no history as an independent contractor. With John having taken no affirmative action to establish himself as an independent contractor, he is an employee.

John has learned from his experience but wonders what he must do to be considered as an independent contractor which he would like to be for many reasons, including taxes. Had he the money, he would have consulted a lawyer. Maybe, he will Google independent contractor. Maybe he finds a blog or article that informs him more specifically as to his dilemma. He has no idea what a potential hiring person can prove or not and really does not understand what that entails. He just wants a job that will pay him fairly during hours he is not studying or attending classes. He happens to see an attorney posting an ad at his school and generates the courage to describe his plight. The attorney gives him great advice. Get a job, be an employee and forget you ever heard about any distinction between independent contractors and employees and, pay your taxes!

John continues to study at school but he obtains a commercial driving license and in his free time he ponders driving a taxi as a substitute driver for a friend of his, driving for a delivery services company or maybe making deliveries for a neighborhood pharmacy. Is he an independent contractor in any of these alternatives? As to driving a taxi, No; as to driving for a delivery service, No; as to making deliveries for the pharmacy, No. Why? If the hiring person cannot prove John has chosen to be in a stand-alone business and has accepted the burdens and benefits of self-employment by, for example, incorporating, licensure, advertisements, routine offerings of services to the public, or to a number of potential customers and the like, the answer will remain NO for all 3 alternatives.

What if John takes on one of the 3 jobs described above and works in that capacity for 3 years: he receives 1099s, he pays his taxes, has his own car insurance, and may or may not pay for gas and driving expenses? Questionable, but probably NO. It is unclear if the obligations undertaken by John are sufficient to prove he intends to be in a stand-alone basis. Note that John has not incorporated or formed an LLC so that it is unclear that a separate business exists which can distinguish John’s efforts from that of a part time employee. Can a sole proprietorship be an independent contractor? Don’t know whether an individual or a sole proprietorship can ever be an independent contractor. It may depend on answers to the other 2 questions. Also, must point out that because the ABC Test presumes that a hired person is an employee and the hiring person must prove otherwise, questionable cases probably end up as NO’s.

John, grows tired of driving part time, his education has progressed so that he can do simple accounting and bookkeeping functions very well. As a result, he is hired just for the months of April, May and June to do the overflow work for a tax accounting firm. He signs a contract which states he is an independent contractor. He is told he will be paid without any deduction for taxes or similar charges such as disability or unemployment insurance. Is John an independent contractor? Probably No. While there may be more to be analyzed, if John’s work is the same or substantially similar to the work done in the core business of the tax accounting firm, then you need analyze no further, the answer is NO. And remember, questionable cases probably end up as NO’s.

John decides that the risk is too great to take at the tax accounting firm, but he has honed his analytical skills and believes he can perform the functions of a legal secretary or a paralegal for a very small law firm. Will he be an independent contractor? If John does not obtain a paralegal license but performs that kind of work he has problems other than classification issues. This analysis is no different from that required to ascertain if his work relationship with the tax accounting firm was that of an independent contractor. Again, one would have to determine that paralegal or legal secretary work was not part of the course business of the law firm, if you cannot do that you need not analyze further, the answer is NO. Even if you get by that hurdle in your analysis, remember, questionable cases probably end up as NO’s.

Ok, enough of the knee-jerk reactions and on to the more complete analyses with some examples of judicial decisions under the ABC test.

THE ABC’S

What is the ABC Test? The classification of an independent contractor vs. an employee, at first blush, only requires the hiring entity to answer 3 questions:

  1. Is the worker free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of work and, in fact?
  2. Does the worker perform work that is outside the usual course of the hiring entity’s business?
  3. Is the worker customarily engaged in an independently established trade, occupation or business of the same nature as the work performed by the hiring entity?

Ok, you now know the ABC test. How do we balance the ABCs? Is A, B or C more important? From what perspective do we apply the ABCs? How do we determine to answer Yes or No to each of the 3 questions? This is where the ABCs become deceptively simple. You do not balance the ABCs and no one of A, B or C is more important than the other.

AS A PRACTICAL MATTER, THE FOLLOWING PRESUMPTION TOGETHER WITH QUESTION B ARE THE DEATH BLOWS FOR INDEPENDENT CONTRACTOR RELATIONSHIPS:

The ABC test presumptively considers all workers to be employees and permits workers to be classified as independent contractors only if the hiring entity demonstrates that the worker in question satisfies each of the ABCs.

So, as a practical matter what that means is that before you determine if the ABC test has been met, you must understand that you start that exercise by presuming that the hired person is an employee and therefore, the hiring entity has the burden of proving that the hired person is not an employee and is an independent contractor throughout the term of the relationship.

  1. If the hiring entity wants a hired person to be classified as an independent contractor, the hiring entity must answer each of the 3 ABC questions with a “YES”. This is true, irrespective of whether the hired person wants to be classified as an independent contractor.
  2. If the hired person wants to be classified as an employee, the hired person must only be able to show that the answer to any one of the ABCs is “NO”.

With that presumption in mind, let’s look at the work to be done to apply correctly, the ABCs. Remember, before you can answer: Yes or No to questions A, B and C, you must do the kind of analyses which are set forth in subsection a) under each of those ABC questions as noted below.

A:   Is the worker is free from the control and direction of the hiring entity in connection with the performance of the work?

  1. a) To meet this test the hiring entity must prove:
  2. i) the worker’s freedom from controlling the performance of its work is found both in contractual provisions and from an analysis of the actual daily functions of both the hiring person and the hired person;
  3. ii) the hiring person does not have the contractual right or the actual exercise of the right (even in the absence of a contractual right) or ability to exercise the type and degree of control that a business typically exercises over employees; and

iii) even though the hiring person does not retain the ability to control the precise manner or details of the work to be performed, it does not otherwise exercise actual control over the worker’s performance that is greater than what would be found in a genuine independent contractor relationship.

  1. b) Examples of what might, or might not, be sufficient to demonstrate absence of control:
  2. i) A worker who specializes in historic restoration, sets his own hours, is not supervised by the hiring entity, purchases all materials used, has his own business card and declined an offer to be an employee because he wanted no control over his activities, was found to be an independent contractor to a construction company that was in the home building industry.
  3. ii) Knitters and sewers who worked in their own house, on their own machines, and at whatever hours they chose, but produced clothing that precisely followed the patterns, and used yarn, provided by the hiring company, were found to be sufficiently under the control of the clothing company to be deemed employees.

iii) A truck driver was under the control of the hiring entity, and held to be an employee, where he was required to keep the truck clean, obtain the hiring entity’s permission to transport passengers, go to the hiring company’s dispatch center to obtain assignments, and was subject to termination if he was tardy, failed to contact the dispatch unit or violated any of the hiring company’s written policies.

  1. Does the worker perform work that is outside the usual course of the hiring entity’s business?
  2. a)   The services performed are those that would ordinarily be viewed by others as what would be done by those working in the hiring entity’s business and not the type of services performed by an outsider (i.e., independent contractor).
  3. b)   Examples of work relationships which have and have not been determined to be working outside the hiring entity’s business and additional relationships not addressed yet:
  4. i) A retail store hires a licensed plumber to repair a leak in the bathroom or an electrician to install a new electrical line are examples of the CSC’s understanding of an independent contractor relationship because their services are not part of the store’s usual course of business and the store would not reasonably be seen as having suffered or permitted either of them to provide services to it as an employee.
  5. ii) A bakery that hires a skilled cake decorator to work on a regular basis on the bakery’s custom-designed cakes which are sold by the bakery and work-at-home seamstresses are hired by a clothing manufacturer to make dresses from cloth and patterns supplied by the manufacturer that will be sold by it, are examples of what the CSC concludes are employees because the workers are part of part of the hiring entity’s usual business operation and the hiring entity can be reasonably viewed as having suffered or permitted the workers to provide the services as employees.

iii) what about a plumber, electrician and carpenter being hired on a semi- regular basis by a contractor to work on either restorations or building new houses? Any different, if they are hired to provide services relating to the restoration or construction of commercial office buildings which require a much more time to complete the separate projects of each? Is there a difference if the contractor recommends use of the 3 hired persons and each of them enters into a separate contract with the owner?

In the CSC’s discussion of B. it makes a reference to what it refers to as the need for a level playing field and the need to prevent the type of “race to the bottom” which occurs when businesses can implement substandard wages or other social protection otherwise provided for by applicable legislation.  Therefore, we can expect that if there is any form of social, progressive or protective legislation or regulation that otherwise creative solutions designed to distinguish between roles of employees and the hired persons who the hiring entity and the hired person want to be classified as an independent contractor, may well fail if that solution can be viewed as an attempt to evade those types of legislation.

  1. 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.
  2. a) This appears to be an extension of the analyses which historically have analyzed whether the hired person considers itself to be an independent contractor in a stand-alone business for purposes of a given relationship.   The CSC actually states that the worker described in C. above, is an individual who independently has made the decision to go into business for himself or herself.     The CSC further explains the meaning inherent in such a determination by the hired person as one which can be demonstrated by undertakings (by their nature- historical) the worker has chosen which reflect the burdens and benefits of self-employment by, for example, incorporating, licensure, advertisements, routine offerings of services to the public, or to a number of potential customers and the like. As a result, this analysis of independence is not one where the facts are limited to those inherent in the single relationship being studied. Accordingly, the hiring entity must prove that the worker has been and is customarily engaged in an independently established trade, occupation or business.
  3. b)   Other courts have concluded:
  4. i) Siding installers were employees, although the installers provided their own tools when the hiring entity failed to prove that the installers had business cards, business licenses, business phones, or business locations and failed to show that they received income from any other party.
  5. ii)   A pickup and delivery service, the hiring entity, failed to establish that a bicycle courier was engaged in an independently established business where the hiring entity failed to prove there was no evidence that the bicycle courier “held himself out as an independent businessman performing courier services for any community of potential customers or that he had his own clientele, utilized his own business cards or invoices, advertised his services or maintained a separate place of business and telephone listing.

iii) The fact that the hiring entity permits the hired person to provide the same or similar services for other businesses is not sufficient to establish that the worker is customarily engaged in an independently established business for purposes of the C test.

CONCLUSION

The application of the ABC test will result in fewer businesses being able to treat hired persons as independent contractors without exposure to penalties, fines, serious tax consequences and other actions of State regulatory and quasi-legislative governmental agencies. It remains to be seen whether the CSC will apply the ABC test to circumstances other than those which involve some form of legislative, judicial or regulatory action backdrops arising from the need to address heath, welfare and other protections of workers in California. The CSC’s specific observations with respect to the existence of such broad protections and the stated intention of not allowing California to be part of the “race to the bottom” in respect of the potential loss of those protections is strongly suggestive of the CSC’s intention to expand the scope of the Dynamex decision. The adoption of the ABC test and the apparent intention to abandon an approach to classification which includes balancing differing factors while weighing the import of some or all of them in its heretofore governing decision Borello decided nearly 3 decades ago with the mandated presumption that in any classification decision you presume a hired person is an employee with there being a burden on the hiring business to prove to the contrary, serves to narrow the instances in which a hiring business will conclude a person is an independent contractor rather than employee. The application of that presumption will cause may businesses to avoid relationships that with the application of the Borello multidimensional factors would have resulted in classifications that supported independent contractor relationships or that, at least, there was some room to argue not unreasonably that the classification was supportable. Finally, the need for a hiring company to prove that an independent contractor is engaged in activities that are not part or an extension of the core business, is extremely problematic. Previously, that might have been a factor to be analyzed, but it was not a factor which under the ABC test cannot be offset by other facts or circumstances.

As a result, I believe that the adoption of the ABC test and the economic and expense burdens on small and medium sized businesses which arise because of the analyses required by lawyers or accountants, makes their engagement of persons as independent contractors improbable unless the management of those businesses are ignorant of the law or simply choose to ignore it. The impact on big business is much different as they presumably have the resources to challenge how the ABC test is applied and the underlying analyses which interpret the application of the 3 broad questions are weighted or balanced (notwithstanding the fact that the ABC test is hailed as providing a simpler and more objective test, a conclusion with which I disagree).

Should Uber and Lyft be concerned about the implementation of the ABC test? Absolutely. I believe the biggest impact on them and other larger companies will arise from the adoption of the ABC tests not just for wages, overtime, meal and rest breaks and other working conditions, but for the expansion of use of the ABC tests to federal social security and payroll taxes, withholding taxes, unemployment insurance taxes, state employment taxes, worker’s compensation insurance, labor law protections, business reimbursement purposes, safety laws and other similar public or social purpose legislation. Moreover, I do not believe that Uber self-defining itself as a technology company with software applications and not a transportation company will win the day for it or Lyft or any other companies that seek to avoid the social purpose laws based on highly sophisticated and technical definitions of the scope of their work. Remember, in California there is now presumption that the drivers are employees.