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Worker Classification Challenges Will Continue For California Businesses

independent contractors at work

Businesses seeking clarity on the issues of proper classification of workers as independent contractors or employees will get little satisfaction by the end of this year.  The Ninth Circuit Court of Appeals recently decided to withdraw its May 2, 2019 opinion that the Dynamex ABC worker classification test should be applied retroactively, referring the case to the California Supreme Court to decide. In the meantime, businesses will have to wait to see how this issue is ultimately decided.

The current California legislative term will end on September 13, 2019 and AB 5 “Worker Status: employees and independent contractors”, also drafted with the intent to codify the Dynamex case, will probably do little to bring clarity to the issue.

AB 5 will codify the Dynamex decision which ruled that a worker will be classified as an employee unless the company engaging the worker can show:

  1. That the worker is free from the control and direction of the hiring entity in connection with the performance of work, both under the contract for the performance of the work and in fact; and
  2. That the worker performs work that is outside the usual course of the hiring entity’s business; and
  3. 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 entity.

Many industries have pushed to have the proposed law exempt them from the ABC standard. The current legislation as drafted will exempt industries that have historically been considered independent contractors, including, doctors, lawyers, securities brokers, and hairstylists. Many other industries are seeking exemption as well.

Industries exempt from the ABC test would be subject to the less strict Borello test, where an independent contractor classification is more likely. Borello applies a combination of common law, the economic realities test and the six-factor test to determine whether the worker should be classified as an independent contractor or an employee. Borello focuses more on the employer’s actual or right to control the worker, with regard to both the work done and the manner and means in which it is performed.  Borello also considers factors such as an in-depth analysis of a worker’s business structure, occupation and professional skills, as well as the nature of the parties’ relationship including its length and payment scheme. An independent contractor classification is also possible if the employer retains pervasive control over the engagement and if the worker’s duties are integral to the company’s business.

Working through which rule applies to which industry has been challenging for the legislature. As recently as August 12, the California Senate Appropriations Committee suspended discussion on the bill due to its potential financial impact based in part on what industries will be exempt. The suspension temporarily puts the bill on. However, the legislature has indicated the suspension in this case should be brief, and the AB 5 will become law.

These current challenges illustrate the complexity of the worker classification issue. The biggest  unresolved question relates to whether the bill will address the gig economy and workers whose services for companies are facilitated by tech platforms. California’s Senate president pro tem Tony Atkins indicated this question may not be resolved until 2020. If that is the case, the question of whether the ABC test will be applied retroactively will still have to be answered.

New ways of organizing work and creating new jobs continue to develop, meaning worker classification questions will continue to get more complicated. Recent proposals by major gig companies to extend benefits to independent contractors without impacting classification status is only the latest example. Clarity for issues like these remains elusive, and this year’s rulings, bills, postponements, and proposals only illustrate how challenging it is becoming for businesses to address them.

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