In the recent era of “Gig Economy”, it has become increasingly popular for companies to hire short and long term contractors instead of actual employees. For many Nordic companies seeking to establish a sales or R&D office in the US, this might seem like an attractive option. However, a recent court case and a newly signed bill in California will limit your possibilities to do so.
Let´s start with the court case, Dynamex Operations West Inc. v. Superior Court of Los Angeles, which jolted the business world back in 2018 by making it much more difficult to designate workers as independent contractors than earlier. In this case, the high court adopted a new legal standard for determining whether workers should be classified as employees or independent contractors for purposes of California wage orders. The court adopted the “ABC test” in which an employer must show that a worker is or does each of the following in order to consider him or her an independent contractor:
(A) 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) Performs work that is outside the usual course of the hiring entity’s business.
(C) Is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.
A couple of things to consider: The employer (not the state) carries the burden of proof, and not just one or a majority of the factors in the ABC test need to be satisfied but all three of them. Further, one should be particularly aware of factor B, which means that employers will have to show that the work performed is outside of the usual course of business. So for example, it would be difficult for a software development company to show that a Silicon Valley programmer was properly classified as an independent contractor, whereas a plumber would probably meet the test.
After the Dynamex case came, lawmakers stepped in. In California, the Assembly Bill (“AB”) 5 was signed into law on September 18, 2019, and will take effect on January 1, 2020. This bill codifies the outcome in the Dynamex case. It exempts certain occupations such as physicians, surgeons; securities broker-dealers, investment advisors or their agents and representatives; and certain salespersons as well.
For employers, the distinction between employee and independent contractors is an important one. If not done right, they can face liability going back several years for alleged violations of California wage orders or workers’ comp insurance requirements. Employees are entitled to certain employment benefits such as minimum wage and overtime pay, whereas independent contractors are not. Employees are further protected against wrongful termination in violation of public policy, whereas an independent contractor is not.
This is a somewhat sensitive subject, not the least for the Ubers and Lyfts of the world, and we can assume that the last word has not yet been said. For now, however, anyone hiring an independent contractor for work that is not clearly outside the usual course of the hiring entity’s business should be aware that there is a risk this will be classified as employment if challenged.
