The California Supreme Court has agreed to review a controversial Court of Appeal decision which, if affirmed, could dramatically expand the definition of an employee in California. In Dynamex Operations West Inc. v. Superior Court, the court will address the legal standard for determining whether a worker classified as an independent contractor is really an employee. The Supreme Court’s opinion is expected to be significant for companies that want to engage independent contractors in California.
As the leading independent workforce compliance and engagement solution provider, the compliance team at TalentWave reviews thousands of client-referred contractors each year on behalf of our clients in order to make a defensible worker classification recommendation. Our legal team constantly monitors the legal landscape for new legislation and court rulings, such as this pending one in California, which impact how our clients can engage with the contingent workforce. And since California often sets the precedent for new legislation and legal interpretations across the country, this is one to watch.
Growing Demand for Independent Contractors
Driven by a number of demographic and firmographic trends there has been a huge growth in the independent workforce in recent years. Many industry experts now predict this segment of workers could approach 40%, or more, of the total US workforce by 2020. Whether we label these workers as freelancers, consultants, gig workers, or independent contractors they have one thing in common: these workers want to be independent and have no desire to be employees of a single company.
The Complexity of Independent Contractor Classification
In the United States there are only two recognized and defined categories of workers: employees, and independent contractors. In order to classify a worker as an independent contractor we must review both the worker and the work they have been engaged to perform on behalf of a client. This detail-oriented assessment is challenging because there is no standard definition of an independent contractor – depending on the state and the auditing agency, there are many different tests with a number of different factors to consider. In addition, even when there is a clear test to follow, the law generally dictates that a “preponderance” of evidence should guide the decision…in other words, there are many shades of gray when it comes to independent contractor compliance evaluation.
While the new economy has grown rapidly, the relevant legal standards and employment laws have not kept pace. While companies continue down the path of relying more on flexible workers to get work done, the complexity surrounding the classification of independent contractors has grown. In the absence of legislative guidance tailored to the realities of the new economy, California courts and administrative agencies for worker protections like unemployment and workers comp have struggled to apply the law developed during an earlier age.
Details of the Case
By reviewing Dynamex Operations West, Inc. v. Superior Court, the California Supreme Court will re-examine a Court of Appeal decision that stunned many employers by expanding the definition of “employee.” That definition of employee is so broad that it could potentially encompass many individual workers traditionally engaged as independent contractors.
Historically, when companies determine whether workers are independent contractors they must carefully consider how much control the company exerts over a worker and how much a worker economically depends on the company. While often vague, this framework provides some consistency.
The Court of Appeals in their Dynamex ruling adopted the California Department of Industrial Relations’ wage order definition of “employ,” which has a much-broader meaning “to engage, suffer or permit to work.” As a result, the Court of Appeal greatly expanded the meaning of the term “employee,” arguably extending it to nearly every labor relationship a company would be likely to have with an individual worker. The potential negative ramifications of such a definition upon the future use of independent contractors cannot be overstated. So much so that both the U.S. Chamber of Commerce and California Chamber of Commerce have warned that a decision to affirm the lower court’s expansive ruling “would effectively eliminate independent contractor status for any use in California.”
Significant Financial Risk from Misclassification
Misclassifying workers as independent contractors can create significant financial liability for back wages, penalties, fines, and the assessment of back taxes. Additional exposure can also arise when misclassified workers, who would otherwise be entitled to employee benefits, don’t receive those benefits.
Although California is widely regarded as one of the least business-friendly states, companies with workers in other states should not be too relaxed. Worker misclassification enforcement is on the rise across the US. In July 2015, the U.S. Department of Labor’s Wage and Hour Division issued its Administrator’s Interpretation, concluding that “most workers are employees under the FLSA” in part due to the “expansive definition of ‘employ’ under the FLSA”. It is still an open question whether the Trump Administration will shift federal enforcement priorities away from independent contractor issues, but even if that happened there is no sign state governments and the ubiquitous plaintiffs’ bar will stop aggressively challenging independent-contractor classifications.
Companies who use independent contractors must always be prepared to prove they have properly evaluated a worker, and must be prepared to defend their decision. Many companies elect to have an expert, like TalentWave, handle the compliance evaluation and engagement for all their direct-sourced workers, including independent contractors.
“Wikipedia” by Supreme Court of California