California Supreme Court Ruling Makes Independent Contractor Classification More Difficult

The California Supreme Court has made an important change to employment classification law for California employers, that will make it more difficult for companies to appropriately classify workers as independent contractors.

The new "ABC" standard is simpler but more strict than the prior classification scheme. In order for the company to properly classify a worker as an independent contractor, the company must prove the following (note that the burden is on company seeking IC treatment and if the burden is not met, the worker is an employee, the criminal law equivalent of "guilty until proven innocent"):

A - that the worker controls his or her work,

B - that the duties go beyond what the business normally does, and

C - that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

Any of these can derail a would-be independent contractor relationship, but it is the second of these prongs - the "B" in "ABC" - that will be perhaps the most difficult for many California companies including ride-sharing services that claim all drivers are independent contractors.

Whether Uber and Lyft, who have just received subpoenas for more information from the California Attorney General, will be able to argue they are in the business of providing a mobile app, rather than actual transportation, remains to be seen. If not, their business model will need to change dramatically, at least in California.

Companies whose consulting arrangements with ICs previously may have passed muster may find themselves unable to show that the pre-existing relationship still qualifies under the new ABC standard and are well advised to have a business and employment law attorney review the circumstances and agreement and then implement any needed changes.

The case is Dynamex Operations West, Inc. v. Superior Court, County of Los Angeles, Supreme Court of California, No. BC332016, April 30, 2018.

In 2012, a California law went into effect providing for additional civil penalties for wilfully misclassifying workers as independent contractors of $5,000 to $15,000 per violation.

Update: On January 1, 2020, AB 5 became law, which essentially codified Dynamex into statutory law.

Independent Contractors Versus Employees in California

The California Labor Commissioner has determined than a driver for Uber was misclassified as an independent contractor rather than as an employee.  The decision is under appeal and will not therefore immediately affect Uber's operations in California, although it could lead to more similar claims against them inside and outside of California, as well as more claims of misclassification by nominal independent contractors of other California companies.

Uber's assertion, if correct, that similar claims have been rejected in five other states highlights California's pro-employee labor laws.

The decision is a reminder that California small businesses desiring to keep or engage independent contractors need to do so only after consulting with an employment law attorney and implementing policies, procedures, and agreements that support the proper classification of the workers as "ICs" rather than "EEs".  In some circumstances, this won't be possible, and the workers will need to be hired as employees, or - if already working as independent contractors - converted to employees.

2009 California Employer Payroll Tax Rates

The base payroll tax rates for 2009 for California employers have been announced by the Employment Development Department (EDD), and are as follows:

Unemployment Insurance (UI): 3.4% of the first $7,000 of wages per employee, per year (however, an emergency surcharge is also in effect);

Employment Training Fund (ETT): 0.1% of the first $7,000 of wages per employee, per year;

State Disability Insurance (SDI): 1.1% of the first $90,669 of wages per employee, per year (up from $86,698, and up from 0.8% in 2008 and 0.6% in 2007)

Established employers may have a higher or lower UI rate, based on various factors. An emergency UI fund surcharge is in effect for the year.

If you are an employer or prospective employer unsure whether your current or prospective worker is properly classified as an employee or an independent contractor, you should hire an employment law attorney to advise you (I offer these services). Improper classification can lead to costly penalties and interest, as well as the assessment of back taxes.

Additionally, there are a host of legal hoops to jump through - which usually aren't, exposing employers to liability - when hiring a California employee (or an independent contractor). In either case, the relationship should generally be documented in a custom-drafted written employment or independent contractor agreement.

This article, written by a former director of EDD, is a few years old, but provides some general advice for employers on keeping their UI rates as low as possible.

Employee versus Independent Contractor

California's Employment Development Department (EDD), in conjunction with the Internal Revenue Service (IRS), is offering a seminar on employment status issues; that is, whether a worker is an employee or independent contractor. The seminar is available live from time to time, but also online as a webinar or on CD, free. The seminar offers an overview of California law in this area, as well as debunking some common employer misconceptions.

CA EDD Payroll Tax Seminars