Businesses Using Independent Contractors in the Usual Course of Business Need to Consider Converting to Employees Because of a New California Supreme Court Case
On April 30, the California Supreme Court issued a decision in Dynamex Operations West v. Superior Court, which expands the definition of “employee” and calls into question whether individuals may be properly classified as independent contractors. Although the case deals only with California wage orders, it is almost certain to have far-ranging impacts, including in employment tax worker classification cases. For wage order purposes, at least for nonexempt workers, businesses will need to record hours worked, pay overtime, provide meal and rest periods, reimburse reasonable and necessary business expenses, be responsible for basic working conditions, etc. Exerting this amount of control is likely to result in the reclassification of workers from independent contractors to employees for employment tax purposes.
More importantly, the new Dynamex “ABC” test has retroactive effect and requires businesses to immediately reevaluate their relationships with individuals previously classified as independent contractors. The “ABC” test requires that the hiring entity prove each of three specific factors:
(A) that 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; and
(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and
(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
If a worker performs work within the usual course of the hiring entity’s business, e.g., driving for a delivery service, or the worker performs services for only the hiring entity, that worker is an employee for purposes of California wage orders. Improperly classifying a worker can lead to liability under the applicable wage order for, among other things, overtime, meal and rest periods, failure to reimburse business expenses, as well as significant statutory penalties.
As a practical matter, it will be very difficult for businesses to treat workers as independent contractors for employment tax purposes and as employees for wage order purposes. If the Dynamex standard applies to California employment taxes, there will be federal employment tax consequences, too, because, as a practical matter, it is very difficult for businesses to treat workers as employees for California employment tax purposes and as independent contractors for federal employment tax purposes.
Any business that uses independent contractors as part of its business model needs to consider whether to adopt an employee business model in order to limit its liability resulting from the Dynamex decision.
Legal disclaimer: The information in this article (i) is provided for general informational purposes only, (ii) is not provided in the course of and does not create or constitute an attorney-client relationship, (iii) is not intended as a solicitation, (iv) is not intended to convey or constitute legal advice, and (v) is not a substitute for obtaining legal advice from a qualified attorney. You should not act upon any of the information in this article without first seeking qualified professional counsel on your specific matter.
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