Is This Goodbye to Independent Contractors?
A landmark new decision of the California Supreme Court gives a clear new definition for determining whether workers in California can be classified as employees or independent contractors.
In a comprehensive decision reported in various legal updates, the Court held that there is a presumption that individuals are employees and that a business that classifies an individual as an independent contractor bears the burden of meeting the new “ABC Test.” Get it wrong and you can risk substantial fines.
Determining whether an individual is an independent contractor or employee has been problematic for many years. Recognizing this, the California Supreme Court stated:
“Few problems in the law have given greater variety and conflict that the cases arising in the borderland between what is clearly an employer-employee relationship and what is clearly one of independent, entrepreneurial dealing … It becomes more so when the field is expanded to include all of the possible applications of the distinction.”
The Court limited the definition of independent contractor by adopting the “ABC Test.”
It is the burden of the hiring entity to establish that a worker is an independent contractor and in order to meet this burden, the hiring entity must establish each of the following:
- That 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
- That the worker performs work that is outside the usual course of the hiring entity’s business; and
- That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
I am surprised this decision has not had a greater impact on the California business community, since it is a fundamental change.
From now on, employers need to be conservative in making the designation that someone is an independent contractor. You can’t base your decision alone on what the employee “wants” – the California Supreme Court simply says this is not enough.
Misclassifying someone as an independent contractor is risky. There are wage and hour penalties for unpaid wages, unpaid overtime and missed meal and rest breaks, in addition to large civil penalties. If an independent contractor is determined to be an employee, the employer bears responsibility for paying all Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, and providing Workers’ Compensation insurance, health benefits, and pension plan participation.
Furthermore, an entity that “willfully misclassifies” an “employee” faces fines up to $15,000 per violation. If the entity is found to have “engaged in a pattern or practice” of misclassification, the fine per violation can rise to $25,000.
The California State Supreme Court ruling will affect many industries that have grown dependent on independent contractors. I think the hardest hit – and the ones that most need to understand the risk – may be real estate, construction, health care, transportation, and gig economy businesses like Uber and Lyft.
If you have any questions regarding this new decision, or want to converse about business issues in general, I invite you to e-mail or all me.