Contractor or Employee? CA Supreme Court Declares Employee!
With the swing of a gavel, the California Supreme Court has made it substantially more difficult for California companies to engage independent contractors for services. The Dynamex Operations v. Superior Court of California ruling places an increased burden on the hiring company—to establish whether a worker is an Independent Contractor by demonstrating that the worker can pass the newly adopted “ABC Test”, which supersedes federal guidelines.
Under California Wage Orders, the new test expands the definition of “employ” from the previously used Borello Test, which primarily focused on the employer’s right to control the worker. In addition to potential penalties and liability for back taxes, overtime, and meal break/rest period violations, employers that willfully misclassify workers as independent contractors will be subject to significant fines ranging from $5,000 to $25,000.
In order to determine if a worker is an Independent Contractor under these more stringent guidelines, the hiring company must be able to demonstrate that that following three factors are met.
Factor A: Worker is free from the control and direction of the hiring entity in connection with the performance of the work, both as described in the contract and in practice.
Even a minor degree of control exercised by the hiring entity will not satisfy this factor and could result in the worker being classified as an employee.
Factor B: Worker performs work that is outside the usual course of the hiring entity’s business.
The hiring entity must demonstrate that the worker’s services and duties differ from company’s core business to the extent where they would not be viewed as an employee of the company.
Factor C: Worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that of the work performed.
A worker must demonstrate investment in their company (i.e. purchasing equipment and resources, carrying business insurance, promoting their services, etc.) to satisfy this factor.
How does this translate to the business world? Here are a few real-life examples of a hiring company’s failure to meet each prong of the ABC test:
Factor A: A media company hired a photographer to take pictures for upcoming posts. Specific instructions were provided regarding the kind of image it was looking for and asked the photographer to call at the start and completion of the work schedule. Even though the photographer provided its own camera equipment, the media company required that all images be captured on a specific lens. Exercising so much control over the work being performed fails Factor A.
Factor B: A creative agency needs to hire a graphic designer to help create a pitch for a potential new client. Hiring someone to perform work that is core to the creative agency’s business fails Factor B.
Factor C: A pharmaceutical company hires a worker that does not have an independently established business but signs an agreement for services stating the worker is an independent contractor and not an employee of the company. Assigning a worker independent contractor status in a contract without proving the worker has an established business with multiple clients and investments in the business (licenses, insurances, advertisements, etc.) fails factor C.
What should business leaders do? Now, more than ever, it’s imperative that there are consistent, compliant processes established for the initial and ongoing evaluation of your independent workforce. Below are a few key points to keep in mind:
- Avoid engaging ICs that provide services that are integral to your core business functions or to augment current staff
- Avoid exercising control over your ICs - not just in facts, but in practice
- Avoid engaging ICs that are not operating as independent businesses
- Engage legal/HR departments or external consultants for guidance
- Review established corporate policies on how IC engagement is managed
- Create a central, systematic process for engaging ICs
- Review existing contracts for alignment with the ABC test
Theresa Rilli is the VP of Operations for Atrium’s Contingent Workforce Solutions team. To learn more about Atrium, their worker classification and workforce compliance solutions, visit https://www.atriumstaff.com/contingent-workforce-solutions/.