The California Supreme Court recently clarified the standard for determining whether workers in California should be classified as employees or independent contractors. In response, companies doing business in California have had to reconsider their own classification processes, and ensure that they are treating workers properly under California wage and hour laws.
In the long-awaited opinion, the California Supreme Court ruled that a worker is presumed to be a full-time employee, unless the hiring company can establish each of the following three factors:
(A) the worker is free from the control and direction of the hiring company in connection with the performance of the work—both under the terms of the worker’s contract and in actual practice.
(B) the worker performs work that is outside the usual course of the hiring company’s business; and
(C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work he or she is retained to perform for the hiring company.
Businesses that fail to comply could face fines anywhere from $5,000 to $25,000.
The ruling will have a significant impact given the proliferation of the gig economy in California, said Jim Evans, an attorney with Alston & Bird in Los Angeles.
Employees are generally entitled to certain benefits under California law — such as minimum wages, overtime pay, and meal and rest breaks — that are not traditionally available to independent contractors. The new California test may make it easier for independent contractors to claim that they have been misclassified and are entitled to such benefits.
"Employers in California should expect much tougher standards in litigation asserting misclassification of independent contractors," Evans said.
"Class-action litigation challenging independent-contractor classifications has become fairly common, especially for companies in the sharing economy," he added.
Read: How One California Company Adjusted to Recent Freelancer Ruling.
The growing trend of worker misclassification has been one of the biggest storylines within the rise of the freelance economy. Since 2013 more than one-third of mid-size U.S. businesses have been fined or penalized for non-compliance, according to ADP.
As California companies grapple with the state high court's new misclassification test, they will need to review their current business relationships and utilize technology to ensure everyone is properly classified as either an employee or an independent contractor.
To learn more about how some California businesses are creatively responding to the recent ruling and how you can use those best practices, email [email protected]. To request more information or get a free consultation from one of our workforce experts.
