Recent Court Decisions Will Make it More Difficult for California Businesses to Classify Workers

Posted: October 8, 2018 | Press

For many years, companies have sought to avoid the cost of overtime pay, workers’ compensation, and other economic and administrative burdens by classifying workers as independent contractors. However, the question is will the courts agree that your company’s workers are correctly classified as independent contractors? The rules concerning the proper classification of workers have not been clear and the risk of getting it wrong is great. In recent years, the State of California has declared the misclassification of workers as independent  contractors to be a serious problem.

From the perspective of business owners, workers who are classified as independent contractors do not require the business to pay payroll taxes, minimum wage or overtime, or comply with various wage and hour law requirements such as providing meal breaks and rest periods, or reimbursing workers for business expenses such as tools and travel expenses. Additionally, the company does not bear the burden of paying additional workers’ compensation insurance, unemployment insurance, disability insurance, or social security.

The government has its own countervailing interests when it comes to how workers are classified. For instance, the Employment Development Department is concerned with the payment of employment-related taxes. The Division of Labor Standards Enforcement is  concerned with the enforcement of state wage and hour laws. The Division of Workers’ Compensation also has a stake in how workers are classified. These various agencies are tasked with enforcing their respective rules and regulations and have the ability to impose  monetary penalties for violations. From this governmental point of view, the misclassification of workers as independent contractors deprives the state of millions in tax revenue.

Under the laws in California, there is a rebuttable presumption that a worker performing services is an employee and all of the attendant rules, regulations, and taxes that come with classification as an employee are presumed to fall upon the employer. The potential liability and monetary penalties that may be imposed upon a business in the event that any of its workers are found to be improperly classified as independent contractors are significant. Employers can be held liable for extensive damages and penalties for unpaid wages reaching back years.

Lawyers representing workers, as well as the various governmental agencies mentioned above, are actively looking for and litigating cases concerning the misclassification of workers.

Most people believe (incorrectly) that the determination of whether a worker is an employee or an independent contractor is dependent on how the worker is treated for federal income tax purposes. Unfortunately, this is not the test that the courts use to determine if a worker is properly classified. Likewise, the fact that the parties have a written independent contractor agreement is not a determinative.

In the past, courts have considered a number of factors set out by the California Supreme Court in 1989 in the case of S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal 3d. 341. Under this test, referred to as the “Borello Test,” the court considers numerous factors. The single most significant factor has been whether the company retains control over the worker and “the manner and means” by which the worker performs the work.

Over the past several years, California courts have shown a clear trend towards finding that workers are classified as employees rather than independent contractors.

This year has seen two more significant court decisions that have addressed the issue of worker misclassification. Earlier this year, in the case Dynamex Operations West, Inc. v. Superior Court of Los Angeles (decided April 30, 2018), the Supreme Court for the State of California announced a new test for determining the proper classification of workers. This new test is known as the “ABC Test.”

“The ABC Test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions: (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 the work and in fact; and (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 that involved in the workperformed.”

This new test adds an additional component to the equation, part “b.” This recent decision by the California Supreme Court will now make it more difficult for businesses to classify workers as independent contractors.

One industry in particular that has litigated this issue is the trucking industry. Interstate motor carriers, which are governed by Federal Trucking Regulations, have often asserted in court that Federal Regulations preempt state law in this area and, therefore, should not be applied. Recently, the United States Court of Appeals for the Ninth Circuit ruled that Federal Trucking Regulations did not preempt the California Labor Commission from using the Borello standard to determine whether a federally-regulated motor carrier has properly classified its drivers as independent contractors (See California Trucking Association v. Julie Su, No. 17-55133, 2018 WL 4288953 (9th Cir. Sept. 10, 2018). This recent Federal Court decision, which was briefed and argued in Federal Court before the California State Supreme Court announced its decision in the Dynamex case, exemplifies the policy of the State of California to classify workers in California as employees.

For the businesses who find themselves in court litigating these sorts of employee misclassification cases, the legal tide is turning against finding that workers are independent contractors. If your business regularly engages the services of independent contractors as part of its labor force, then it is advisable to seek the counsel of experienced lawyers who understand this complex and changing area of the law.

Gregory J. Ferruzzo