The ABC’s of Employment Status: Employee or Independent Contractor

09.18.18Marsi Harris

That is the question that can no longer be vaguely answered but rather needs to be precisely defined.  Say goodbye to the days where a business can hire an independent contractor without looming liability and say hello to specific and rigid criteria that requires immediate reassessment for those organizations who regularly “hire” independent contractors and want to avoid exposure to back pay and fines, and violation of various federal and state statutes.

How does one determine the classification of an employee vs. and an independent contractor you might ask?  Well, on April 30, 2018, the California Supreme Court implemented a 3-factor criterion test that you must pass, with no exceptions.  In the eyes of the California Supreme Court, all workers are presumed employees unless you can pass the ABC test, and demonstrate compliance, regardless of any mutual agreement between the parties.

So, without further ado, let’s get to the burning questions and relearn our ABC’s!

Under this new ABC test, the hiring business bears the burden of proving each of the following factors to support its independent contractor classification:

(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 the work performed for the hiring entity.

How will the ABC Test affect your business?

The Court firmly believes “Employee until proven contractor,” which means if you can’t answer YES to all the above criteria, then your Independent Contractor is misclassified.  Your liability has risen as an employer and it is advantageous that immediate action is taken for employers who utilize Independent Contractors in any capacity.

Can I sit idle and wait and see?  

The simple answer is, NO! The California Supreme Court’s decision is expected to further increase the number of wage claims, lawsuits, and class actions by independent contractors.  The expectation for businesses is that at the very least, an internal audit is done and any failure to the ABC test means you need to reclassify your Independent Contractor to Employee immediately.  If you do not, severe consequences await, resulting in awards of unpaid wages, as well as penalties, interest and attorneys’ fees.

As an employer, the following scenarios are plausible and examples of where potential liability could occur:

•     An Independent Contractor for the past 5 years becomes disgruntled and files a lawsuit claiming loss of overtime, unpaid meal breaks and complete violation of worker rights.  Recently, an Uber driver filed for unemployment and it was granted, leaving room for other drivers to follow suit.

•     The worker you have hired, that you believe is an independent contractor is injured and files a workers compensation claim.  The worker can sue on the basis of the misclassification. That claim may raise the issue of lack of workers’ compensation but also the possibilities of unpaid overtime and other benefits.

The burden of proof is now on the employer to prove that the Independent Contractor was not entitled to “employee” rights under the Wage Order, Workers Compensation other other protected benefits. An employee enjoys numerous benefits and protections not eligible to independent contractors and therefore, it is vital that businesses take a hard look at their worker classifications, be proactive and take swift action.  

What’s Next?  

It is advised that any organization that is just getting started, is growing or regularly works with independent contractors, should consider seeking guidance to ensure compliance. Otherwise, you increase your risk of potential lawsuits under the California Wage Orders.  Immediate reassessment of your independent contractor relationships is crucial!