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Beware of the Independent Contractor Trap
December 06, 2018
Parsons Behle & Latimer Legal Briefings

Companies are often tempted to pay their workers as independent contractors to procure significant financial savings.  A company is not required to pay overtime wages, payroll taxes, unemployment insurance premiums or workers compensation insurance premiums for independent contractors. While the financial benefits of paying workers as independent contractors can be significant, so can the risk of misclassification.

Earlier this year, the California Supreme Court struck a blow to companies that treat workers as independent contractors rather than employees. In Dynamex Operations West, Inc. v. Superior Court of California, the California Supreme Court addressed the issue of whether the drivers of a same-day delivery service were properly classified as independent contractors or whether they should have been classified as employees for purposes of California wage orders. Wage orders impose obligations relating to minimum wages, maximum hours worked and a limited number of basic working conditions such as minimally-required meals and rest breaks.

After outlining the history of case law in California regarding the issue of worker classification, the Court concluded that the “ABC test” should govern whether workers are properly classified as employees or independent contractors for purposes of California wage orders. Under the ABC test, a worker is presumed to be an employee unless the company employing the worker can demonstrate that: (A) the worker is free from the control and direction of the company 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 company’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.

The Dynamex decision received considerable attention across the country as the ABC test adopted in Dynamex imposes a very high burden on companies to prove that workers are, in fact, independent contractors. Many employers have taken the position that because of the Dynamex decision, it is simply impossible to classify workers in California as anything but employees . But California is not the first state to adopt the ABC test. Courts and legislatures in other states, including, among others, Nevada, Oregon, Washington, Connecticut, Delaware, Illinois, Maryland and New Jersey, have adopted various versions of the ABC test in different employment contexts.

Dynamex does not represent a turning point in employer versus independent contractor jurisprudence. Rather, it is a high-profile case marking a trend of developing hostility in courts and legislatures in various parts of the country toward companies classifying workers as independent contractors.

Companies should review with counsel the facts surrounding any workers classified as independent contractors. Different states employ different tests, and even within the same state, different tests may apply in different employment contexts. For example, there may be a different test applied to wage claims than is applied to unemployment insurance claims or workers compensation claims, all within the same state. Further, those state tests may differ from tests employed by the Department of Labor regarding claims under the Fair Labor Standards Act or the Internal Revenue Service regarding taxes. The penalties for misclassification can be severe and are usually applied in relation to all similarly-situated employees as the employee making the actual claim.


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