Independent Contractors Archives

Areas of Law: This newsletter touches on several intertwined areas of business and employment law that are impacted by California’s new laws: (1) Employee v. Independent Contractor plus Wage and Hour; (2) Arbitration; (3) Discrimination and (4) Other areas.

Why it Matters?: In our opinion, any business — whether it has 5, 50, 500 or 5,000 employees — should pay close attention to all of these changes as any one can be the trigger for significant financial liability. If your business needs help addressing these issues, please contact our firm.

1. Independent Contractor v. Employee (Dynamex and Borello)
AB5 codified the Dynamex ruling from the California Supreme Court, which applied the ABC test (see our August 2, 2018 update, “The ABCs of Independent Contractors“) to determine whether a worker is an independent contractor. In summary, to be an independent contractor the worker must (a) be “free from control and direction”; (b) “perform work outside the usual course of the hiring entity business” and (c) “customarily engaged in an independently established trade.” Under this ABC test, we believe it is very difficult for a business to establish that a worker is an independent contractor. There is some minor flexibility for businesses hiring licensed professionals or receiving professional services as these relationships are analyzed under another test (Borello).

Our business has always used a lot of Independent Contractors, what could go wrong?
Well, everything. Lawyers often use the phrase a “parade of horribles”, and that would be appropriate here. A single alleged independent contractor could (a) file a complaint for workers compensation, (b) file an unemployment insurance claim; (c) file a labor claim for overtime, or (d) hire an attorney to file a “wage and hour” claim (including pay stub compliance, meal break violations, rest break violations and failure to pay overtime). If a wage and hour claim is filed, the damages escalate quickly including statutory penalties and attorney’s fees…and there is no insurance.

Wage and hour claims are frequently filed as class actions.Likewise, there could be an EDD audit. In a “misclassification” based action, the Company’s only defense will be that the worker is an independent contractor, which was always hard to establish, and just became much more difficult. Bottom line, in most situations, the Company will lose the independent contractor battle in our opinion. If you are a business owner with a history of hiring a lot of independent contractors, we recommend that you consult with law firm to see what can be done to lessen your exposure. There may be lawful steps you can take before a lawsuit is filed. If you would like us to confidentially review your situation, please contact our firm.

2. Changes to Arbitration: Immediately challenged
AB51 banned mandatory arbitration agreements and prohibits employers from requiring applicants or existing employees to waive any right, forum or procedure for any employer violations of FEHA, the Labor Code or other statutes governing employment as a condition of employment, continued employment or the receipt of employment related benefits. The bill also prohibits an employer from threatening, retaliating or discriminating against, or terminating any applicant for employment or any employee because of the refusal to consent to the waiver of any right, forum, or procedure for a violation of specific statutes governing employment. SB707 also requires that in an employment or consumer arbitration where the drafting party is required to pay for arbitration and fails to do so within 30 days after the due day, the drafting party will waive arbitration and face drastic monetary and non-monetary sanctions.

AB51 has been challenged in federal court, and the court issued a 10 day temporary restraining order (TRO). Stay tuned.

3. Changes to Discrimination law: Lactation Rooms, Hair Styles, Training and Time.
There are a number of important changes. SB142 requires a lactation room or location that includes prescribed features with close proximity to a refrigerator and sink. SB188 adds “hairstyles: to the list of potential basis for race discrimination. AB9 extends the time to file a discrimination complaint with FEHA from 1 to 3 years. SB788 extends the time to comply with sexual harassment training for employers with 5 or more employees. For help here, contact our firm.

4. Other updates.
California also passed the following employment related laws, which we will just list in summary form here:

AB749 prohibits No Rehire clauses in settlement agreements
AB673 and SB 688 provide additional remedies for failure to pay wages
SB83 increases the maximum wages replacement under California paid family leave
AB35 strengthens law protecting employees from toxic materials
AB203 requires Valley Fever awareness training is expected to be working near substantial dust disturbance
AB1223 requires private employers with 15 or more employees to provide leave of absence with pay for organ donation
AB1554 requires new notice requirements for Flexible Spending Accounts (FSA)
AB1804-1805 address the law regarding occupational injuries
IRS New W4

If you have a concern that touches on one of these other areas, please contact our firm.

Key Takeaways: What Should a California Business Owner Do?
If you own a business in California with a substantial pool of employees, you might be feeling overwhelmed with all these changes, the associated risks and the potential financial exposure. What should you do? Our recommendations:

1. Get an attorney involved on your side. If you don’t have a general counsel or employment attorney, or your attorney is not experienced with these issues, contact our firm.

2. Review your independent contractor / wage and hour exposure. We have helped several clients address these issues. Work with an attorney immediately (i.e. don’t wait until the lawsuit is filed), and if you receive an EDD audit have your CPA work with your attorney.

3. Improve your payroll systems and processes. You may need to redesign your compensation plans, and processes to get into compliance and minimize future risks.

4. Revise your handbooks. If you don’t have a handbook, get one. We offer a flat rate for our California 2020 handbook, and a reduced rate for annual updates, with reduced rates for multi-company engagements. Contact us for information.

General Background

The classification of an individual performing services for an operating company has long been an area of ambiguity and contention. Oftentimes, an employer may want to classify a new hire as an independent contractor. Oftentimes, an employee may want to be classified as an independent contractor. The critical hot buttons at issue with the classification are tax withholdings, tax deductions, eligibility for overtime, meal breaks, rest breaks and qualification for benefits.

The 9th Circuit’s Dynamex Decision: What You Need To Know

1. Dynamex DOES apply retroactively under California law. The Appellate Court affirmed the the California Supreme Court’s interpretation that Dynamex does apply retroactively, quoting it “is basic in our legal tradition” that “judicial decisions are given retroactive effect.” Ok, that resolves California law. But what about retroactive application under federal law? 2. Dynamex also DOES apply retroactively under Federal law. The defendant-appellee argued that retroactive application was a violation of Due Process. Here, the Court distinguished between retroactive application in a civil context versus a criminal context. As this was a civil matter, the Court referenced the analysis of a legislative act, quoting “adjusting the burdens and benefits of economic life come to the Court with a presumption of constitutionality” and are evaluated under a rational basis test. Here, we have a judicial rule (i.e. Dynamex) and not a legislative act. Therefore, the court reasoned, “[e]ven more deference is owed to judicial common-law developments, which by their nature must operate retroactively on the parties in the case.” 3. Where can an Employer Win on Summary Judgment (or where might there be no employer-employee relationship)? As we advise our client employers, Prong B of the ABC test provides the clearest opportunity. The example used is where a retail store hires a plumber to repair a bathroom leak, then in that situation the hiring entity (retail store) is not engaged in the same usual course of business as the putative employee (plumber). See our earlier articles regarding Dynamex for a review of the ABC test. 9th Circuit in a New York State of Mind: The 9th Circuit is frequently portrayed as populated by jurists from the West Coast or Pacific Northwest. However, this 9th Circuit decision was authored by the Honorable Frederic Block, Unted States District Judge for the Eastern District of New York, sitting by designation. ALG in the Courtroom: The Honorable William Alsup, District Judge was the Presiding Judge on the Appeal Panel. We recently appeared before Judge Alsup in a client matter. How Do You Manage the Risk?: Business and life is about risks, mitigating risks and managing risks. Litigation arising from misclassification is one of those risks. The first approach a company (or contractor) can take is to set up the work relationship as an employer-employee relationship. The second approach would be to set up the relationship as an independent contractor relationship after running through the test with your legal counsel, and with full appreciation of the risks of misclassification in financial terms. The third approach is to search for insurance to cover this risk. At the present time, we are not aware of any, but new products are being created all the time, so we recommend that employers revisit this issue with their insurance brokers periodically.

About Adishian Law Group, P.C.

Adishian Law Group (https://adishianlaw.com) is a California law firm with a statewide practice in the areas of Corporate law, Employment law, Real Estate law and Mediation Services. As of December 2018, the firm has represented corporate and individual clients located across 22 California counties, 13 States outside of California and 10 foreign countries in over 590 legal matters. Adishianlaw.com is one of the oldest continually operating law firm websites on the Internet. The firm serves its clientele via three offices located in the major business hubs of El Segundo, Palo Alto and San Francisco.

For more information about this case, contact Chris Adishian:

It’s as Easy as A-B-C, right?

Independent Contractors are always a point of tension. Recently, the California Supreme Court adopted the “ABC” Test to determine distinguish between employees and independent contractors. The classification of an individual performing services for an operating company has long been an area of ambiguity and contention. Oftentimes, an employer may want to classify new hires as independent contractors. Oftentimes, employees may want to be classified as independent contractors. The critical hot buttons at issue with the classification are tax withholdings, tax deductions, eligibility for overtime, meal breaks, rest breaks and qualification for benefits.

The ABCs of the Dynamex Decision:

The California Supreme Court adopted the ABC test to determine whether an employee is an independent contractor. As the Court wrote: “Under this test, a worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes:

(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and
(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring”

Applying the ABC Test:

The burden of proof is on the employer (i.e. the “hiring entity”). That means, if the classification is challenged, then the courts will start with the presumption that the individual at issue is an employee, and the employer will have to prove that the relationship passes the ABC test. Prongs “A” and “C” of the test can usually be satisfied with some planning and controls. However, we believe that “B” will prove to be very challenging for many companies or independent contractors.

How Do You Manage the Risk?:

Business and life is about risks, mitigating risks and managing risks. Litigation arising from misclassification is one of those risks. The first approach a company (or contractor) can take is to set up the work relationship as an employer-employee relationship. The second approach would be to set up the relationship as an independent contractor relationship after running through the test with your legal counsel, and with full appreciation of the risks of misclassification in financial terms. The third approach is to search for insurance to cover this risk. At the present time, we are not aware of any, but new products are being created all the time, so we recommend that employers revisit this issue with their insurance brokers periodically.

About Adishian Law Group, P.C.

Adishian Law Group (https://adishianlaw.com) is a California law firm with a statewide practice in the areas of Corporate law, Employment law, Real Estate law and Mediation Services. As of December 2016, the firm has represented corporate and individual clients located across 22 California counties, 13 States outside of California and 10 foreign countries in over 520 legal matters. Adishianlaw.com is one of the oldest continually operating law firm websites on the Internet. The firm serves its clientele via three offices located in the major business hubs of El Segundo, Palo Alto and San Francisco.

For more information about this case, contact Chris Adishian: