Independent Contractors No More? | FFS Insights

California set to enact new law making it significantly harder for employers to classify workers as independent contractors.

In the coming weeks, Governor Newsom is expected to sign into law a controversial bill impacting millions of California businesses and workers. The new law drastically alters the legal standard used to determine whether a worker qualifies as an independent contractor in the State of California.

Effective January 1, 2020 (with retroactive application) there will be a legal presumption that all workers are employees, even in instances where a written independent contractor agreement is in place.

Proving a Worker is an Independent Contractor

To prove that a worker is actually an independent contractor, employers will need to establish that the worker satisfies all three prongs of the following “ABC Test”:

(A) The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; (B) The worker performs work that is outside the usual course of the hiring entity’s business; and (C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Ramifications of Deeming Independent Contractors as Employees

As a result of this narrow legal standard, many workers who are currently classified by their employers as independent contractors will now be deemed employees under California law.   What does this mean?

• California workplace laws and regulations will now apply to these newly classified workers, including protections under the Fair Labor Standards Act, the Americans With Disabilities Act, and the Civil Rights Act.
• Employers will now have to offer state-mandated benefits to their newly classified workers, including guaranteed minimum wage, overtime pay and paid sick leave.
• Employers will also incur payroll taxes and will have to make contributions to Social Security and Medicare, unemployment, disability and workers’ compensation insurance.

While the law will greatly impact millions of “gig economy” workers, such as rideshare drivers working for Uber and Lyft, certain occupations will be statutorily exempt from the ABC test. These include  physicians, lawyers, accountants, engineers, registered securities broker-dealers and other contractor-heavy fields.

Employers found to be incorrectly classifying their workers could face significant liability exposure, including unpaid payroll and insurance taxes, along with unpaid wages and penalties.  In light of the far-reaching impact of this groundbreaking legislation, employers should review their existing independent contractor agreements to ensure that they meet the requirements of the ABC test.  Employers should also be mindful that any workers who do not satisfy the test will be entitled to California’s abundant workplace protections and benefits.

***

This alert is made available for educational purposes and to provide general information on current legal topics, not to provide specific legal advice. The publication of this alert does not create any attorney-client relationship and should not be used as a substitute for competent legal advice from a licensed professional attorney.