California Staffing Firms Face New Challenges When Distinguishing Between Employees and Independent Contractors

The courts have been quite busy lately addressing the age-old question of how to determine if a person is an employee or an independent contractor. A worker’s designation as an employee or contractor has important consequences for the employer’s duties and financial responsibilities, as well as the worker’s legal protections. The main takeaway for employers is that the new standard, while seemingly clear, may still result in significant confusion.

Dynamex and Jan-Pro significantly alter the California employment landscape

For California employers, the most significant case on this issue in recent years is Dynamex Operations West v. Superior Court of Los Angeles, No. S222732 (Cal. 2018), which provides a new standard for determination of a worker’s independent contractor status, significantly altering the prior standard that had been in place for almost three decades under the California Supreme Court’s 1989 Borello decision. Specifically, Dynamex held that for a person to be considered an independent contractor, all three of the following conditions—referred to as the “ABC test”—must be met:

  • the worker must be free from control and direction in how to perform the work.
  • the worker performs work that is outside the usual course of the hiring entity’s business; and
  • the worker is customarily engaged in an independently established trade or profession of the same nature as the work being performed for the hiring entity.

Part B of the ABC test has received a lot of attention from employers who routinely use independent contractors to perform routine work. The employer in Dynamex was a trucking company. Drivers it had employed as independent contractors sued for employee benefits and prevailed in part because their work was a core part of the trucking firm’s business.

A subsequent case in federal court, Vazquez v. Jan-Pro Franchising, No. 17-16096 (9th. Cir. 2019), expanded the impact of the Dynamex ABC test by concluding it was to be applied retroactively. This has the potential to significantly alter the employment status for hundreds of employers in California. Retroactive application of the ABC test may create trailing financial responsibilities like minimum pay requirements, overtime, business expense reimbursement, and even workers’ compensation coverage for injuries that would have been covered had the individual been characterized as an employee rather than an independent contractor.

Of note, shortly prior to the Jan-Pro ruling, the U.S. Department of Labor issued an opinion in which they identified six factors for assessing independent contractor status, aligning with standards established in U.S. Supreme Court precedent. The Department of Labor’s standards overlap with the ABC test in some ways. For example, the nature and degree of the employer’s control over the worker is an important consideration under both standards. But in other respects, the Department of Labor’s rules reflect distinct concepts drawn from U.S. Supreme Court precedent, such as the extent to which the worker’s opportunities for profit or loss, the extent of the worker’s investment in the business, and the permanency of the relationship.

For employers in the gig economy, in which workers perform work for multiple employers rather than being “employed” by just one entity, the impact of these rulings may be even more far reaching than anticipated. Around the same time Jan-Pro was issued, Uber Technologies agreed to pay $20 million to settle a lawsuit brought six years ago by drivers in California and Massachusetts asserting they should be treated as employees.

California employers must adjust their practices and be ready for further change

The future of the Dynamex ABC test and its retroactive application under the Jan-Pro ruling remains uncertain. The employer in the Jan-Pro case may yet file a successful appeal to the U.S. Supreme Court. California’s legislature is considering two alternative proposals, one that would restore the Borello standards and the other that would codify the Dynamex ABC test.  The latter would have far reaching consequences for many employers.

For now, it is best for employers to conduct their employee/contractor assessments by applying the most liberal standard, that being the ABC test, while keeping an eye on any further developments with the Jan-Pro case and at the California legislature. .

Gunnin specializes in serving the temporary staffing industry, and helps their clients navigate the challenges of issues just like this. Gunnin’s advocacy and guidance helps to avoid passive retention of liability that can result in coverage gaps that, in turn, can prove fatal to a company. Gunnin can also help clarify the employment status in order to secure necessary coverage in the insurance market by acting as your advocate. If you have questions about how to assess the independent contractor status of your workers, or any other risk management issue, call us today so that we can help you proactively address your needs.

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