Thanks to a New Supreme Court Ruling, California Employers May Want to Think Twice Before Hiring Independent Contractors

Companies are always looking for ways to lower their bottom lines, particularly when it comes to their staffing. Similarly, more and more workers are looking for flexibility to pursue personal business ventures and alternative work avenues outside of the traditional nine-to-five. Freelancing, or working as an independent contractor, is an attractive option for both California employers and workers.

But for California employers, a recent Supreme Court of California decision has severely limited employers’ abilities to classify workers as independent contractors. Because of this recent decision, employers may now be unwittingly walking into a trap when hiring someone as an independent contractor.

Dynamex Operations West, Inc. v. Superior Court was based on a class-action lawsuit waged against Dynamex Operations West Inc, a document and package company with big-name clients such as Amazon. The suit alleged that Dynamex sought to misclassify its delivery drivers and label them as independent contractors instead of employees.

Affirming the Court of Appeals’ prior judgment, the California Supreme Court clarified the definition of  “independent contractor,” providing lower courts with more specific guidelines to follow when determining whether a worker is an  “employee” versus an “independent contractor.”

The Dynamex Three Part “ABC” Test:

Previously, classifying a worker as an independent contractor was set forth in a multi-factor “totality of the circumstances” test set forth in the case S.G. Borello & Sons, Inc. v. Department of Industrial Relations.

Although the determination regarding independent contractor vs. employee in Borello examined a multitude of factors, the most important factor was the level and degree of control the employer had over the worker.

Generally speaking, the more control the employer had over how, when, and where the work was performed, the more likely the worker was an employee. Thanks to the Dynamex decision, the California Supreme Court has substantially narrowed employers’ ability to deem a worker an independent contractor.

Under the Dynamex three part test, the business has the burden of proving that the worker meets all three of the factors in order to be considered an independent contractor:

  1. They must show the worker is independent from any control of the employer;
  2. The worker performs in a capacity that is outside the core business of the company; and
  3. The employee has an established trade, business, or occupation outside of their employment

Under the Dynamex test, it is difficult to see how any worker could ever be classified as an independent contractor. Consider the following example: A successful blogger enters into an independent contractor agreement with another blogger to write articles for his/her website from her home.

Under the new test, it is very likely the employer will fail at least parts A and B of the test. To some degree, the blogger will need to control when the articles are finished and how they are written. Not to mention, the services are most certainly a core part of the blogger’s business (article writing).

Implications and Penalties for California Employers:

It is clear that those hit hardest by the ruling will undoubtedly be California employers using independent contractors. Fines for misclassification of an independent contractor can be levied against the company both from the state as well as from the IRS.

These fines can range from $5,000-$15,000 per violation for state labor code violations to a minimum of 1.5% of the wages paid levied by the federal government. And there’s even more bad news for employers: some of the labor code violations are enforceable through the California Private Attorney General Act, meaning attorneys’ fees and costs are recoverable by the misclassified worker, thereby further exposing California employers.

Hiring an independent contractor is an attractive option to most employers, especially small businesses. It gives a company the opportunity to have someone work fewer hours without the heavy burden of paying employment taxes or any state/federal withholdings. It also alleviates the employer from being required to make certain retirement contributions it offers to employees.

Not only does hiring an independent contractor appeal to businesses, it also appeals to workers. Many people are bootstrapping their own businesses and do not want to be beholden to a company where they are required to work particular hours. Others want the flexibility of indicating whether they will accept certain work and/or projects from their employer.

However, with the imposition of the Dynamex ruling, it is difficult to see how the incredibly successful “gig” economy can survive.  

This ruling has many business owners concerned about the consequences of mislabeling someone as an independent contractor and being challenged. As a result, we may expect to see a slowdown in the hiring and creation of jobs, particularly in the small-business sector.

If you are an employer in the state of California and have independent contractors working for you, it is vital that you understand how misclassifying someone as an independent contractor versus as an employee can affect your bottom line. Contact Trestle Law today to discuss your businesses’ employment needs and how you can protect yourself.