In April of this year the Supreme Court of California issued a landmark decision related to the use of independent contractors. The decision, Dynamex Operations West, Inc. V. Superior Court of Los Angeles, gave the California Supreme Court a fresh opportunity to redefine the previously relied on “Borello test”, and the court laid out a three prong test that must be applied when using independent contractors.
As has been the case for years, in California workers are presumed to be employees and the burden falls on the hiring party to properly ensure the service provider is appropriately classified. With the recent Dynamex ruling, in order to ensure proper classification takes place the hiring party must meet the “ABC test” adopted in April of 2018 by the California Supreme Court. Previously, under the Borello test the court held that the “right to control” was the most important factor among several factors when analyzing if a party should be classified as an independent contractor. Under the new ABC test, the hiring party must show all three exist in order to withstand any scrutiny, and these are:
(A) The worker is free to control the direction of the work, both under contract and as a factual matter;
(B) that the worker is performing services outside of the hiring party’s normal course of business; and
(C) that the worker is customarily engaged in providing consulting services in the same nature as the work performed.
At this point, an example might be helpful. Archetype Legal PC fits the mold as an independent contractor for all of it’s clients. Our team is free to control the direction of the work, and the work is performed off site and using our own equipment. Our services (i.e. legal services) are outside of the scope of services are clients offer their own customer base, and our firm is customarily engaged in providing consulting legal services.
So why does all of this matter, you might be wondering. It’s important because if a worker is classified as an employee the employer is required to pay social security and payroll taxes, as well as workers compensation insurance and unemployment insurance and state employment taxes. Additionally, the employer must comply with a host of federal and state wave, hour and working conditions rules and regulations, which do not apply if the service provider is a contractor.
Therefore, by classifying someone as a contractor instead of an employee the employer has an opportunity in the short term to save money. However, the key wording there is the “short term” because even one misclassification issue can sink an otherwise growing small business or startup.
Although far from a silver bullet when it comes to a misclassification claim, here are a few things we encourage clients to consider including when drafting the consulting agreement assuming the hiring party has determined it can satisfy the ABC test above:
Avoid using words like “control” to describe the hiring party’s role in the business relationship.
Avoid requiring specific hours (such as 8AM-5PM) or requiring the contractor to provide the services from the company’s facility using the company’s tools and equipment.
When possible, pay on a flat fee basis and not by the hour, day, week or month.
Set a specific term which outlines the length of the contractual relationship and do not leave the contract open ended as if the service provider will remain with the company for months, or even years.
Specifically declare the service provider’s status as a contractor and the service provider’s obligation to pay taxes, business license and insurance requirements
This post is meant to function as an overview of the new California Supreme Court ruling, and not all-encompassing labor and employment advice when it comes to hiring contractors. Each reader who is considering hiring a service provider is encouraged to speak to an attorney who can advise the reader on all of the facts and circumstances of your unique situation as well as assist with filling out a proper consulting agreement (as what should be considered goes beyond the bulleted list above).
Disclaimer: This post discusses general legal issues and developments and intended to serve as informational only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Archetype Legal PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.