Hey Compliance Warriors!
California is helping to clear up the blurred lines of who is an independent contractor and who is not. Read on…
Article via: www.mondaq.com
“This spring, the California Supreme Court issued a landmark decision in Dynamex Operations West, Inc. v. Superior Court that has far-reaching consequences for nearly all industries in California. The Dynamex ruling established a new test to determine if a worker is an independent contractor or an employee in California. Because the law treats employees and contractors differently, misclassifying an employee as an independent contractor can result in steep penalties and even criminal charges in certain circumstances. It is therefore extremely important that breweries throughout the state closely review any independent contractor relationships to be sure they meet the new test.
Put It to the Test
Before Dynamex, California employers applied a flexible, multi-factor common law test for nearly three decades to determine whether a worker was an independent contractor. Now, California employers must apply a strict new “ABC test” for all questions under the California Wage Orders, which govern the vast majority of wage and hour questions in California. This includes overtime, minimum wage, overtime exemptions, meal and rest breaks, and recordkeeping requirements, among other topics.
To properly classify a worker as an independent contractor under the new ABC test, the business must be able to prove each of the following three factors:
- 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;
- that the worker performs work that is outside the usual course of the hiring entities business; and
- that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
Conspicuously absent from the test is worker preference. There are workers in industries and professions across the board who request to be paid on a 1099 basis as an independent contractor instead of as a W-2 employee. But the workers’ preference and the existence of a written contract between the parties is not determinative. As you will see, application of the test to seemingly simple scenarios, however, can be tricky.
Factor A: Freedom from Control
The first factor in the ABC test addresses the freedom and independence of the individual in performing the work. Whereas a business can exercise control over its employees, independent contractors must be, well, independent.
To show that the worker is free from control, the business must show that the worker has control over when and where to perform the work and also how to do so. This can be a difficult element to prove. For example, a children’s clothing company in Vermont (which also uses the ABC test), was unable to prove freedom from control over knitters who worked from home and set their own hours because the clothing company provided the clothing patterns and dictated how the product was to be knit.
As a brewery, you might hire a web designer to set up your website. To determine if that web designer is free from your control, consider where the web designer can work, who determines when and how long he or she works, and who determines what method of coding he or she uses. Consider as well what other direction you are giving the web designer. Any micromanagement—and potentially any management at all—could demonstrate a lack of freedom from control over the worker.
Factor B: Work Outside the Usual Course of Business
Under the second factor, the independent contractor must perform work that is unrelated to the hiring entities business. This factor significantly impacts many types of businesses, like the “gig economy” which depends on the use of independent contractors as a business model.
In the brewery setting, a handyman who performs repairs to your tasting room would meet this factor because a brewery is not in the business of construction or building repair. The same would go for an electrician, or a janitor—any worker who is not involved in the making, selling, or distribution of beer.
As for specialized technical work within an isolated function of an employer’s business, however, the court said these are not among the types of jobs that would typically qualify as independent contractors. This could include your brewery’s contract accountant, truck drivers, IT workers, or high-level managers with special skills. This is significant because these jobs have historically fallen within a gray area. This prong of the test could create differing opinions among courts attempting to interpret the new law.
Factor C: Independently Established Trade, Occupation or Business
The third factor in the ABC test looks at whether the purported independent contractor actually operates his or her own business. It is not enough under this factor, for the brewery to merely permit the worker to perform similar work for other companies. Rather, the worker must actually engage in an independently established trade, occupation or business of the same nature as the work they are performing for your brewery.
Under this factor, a friendly hobbyist who offers to help you out may not be worth the risk. For example, your neighbor Bob, who works as an insurance-salesperson by day, is also a Mr. Fix-it when it comes to household repairs. So when the tasting room sink springs a leak, Bob offers to check it out for cheap. He does so on his own time, with little-to-no instruction from you, so prong A of the test is met. Because plumbing is not within the brewery’s usual course of business, prong B should also not be a problem. Prong C, however, poses a challenge under the new test. Be very careful with regard to engaging any independent contractors going forward, especially workers like Bob, who work as single individuals rather than for a company in an independent business. Because Bob does not operate or work for an independent plumbing business, you cannot meet prong C in the rigid ABC test.
So What Now?
A worker in California can only be properly classified as an independent contractor if you can meet each of the three ABC factors. If in doubt, it is better to err on the side of caution and classify the worker as an employee.
If you do decide to classify certain workers as independent contractors, you should take precautions to protect the brewery and demonstrate that you considered and believe you can prove all three factors. For example, keep documents to prove that the contractor really isn’t an employee. Don’t ask the contractor to complete your standard employment application. Instead, ask the contractor for documents that will enable you to establish that he or she is a separate business entity such as business cards, business or professional licenses, proof of insurance, etc. Be sure to document each of the factors you reviewed in making the contractor determination. Some other protections for your brewery include the following:
- Don’t limit who else the independent contractor can work for.
- Consider why and how the independent contractor’s work is outside the scope of the brewery’s business.
- Allow the independent contractor to use his or her own tools.
- Allow the independent contractor to set his or her own schedule.
- Allow the independent contractor to determine the method and means through which he or she performs the work.
- Work with an attorney to draft or review any contract you enter into with the contractor.
Ultimately, independent contractor status should be limited to those who are truly independent from your brewery. Those who make and sell your beer are some of your biggest assets. By reviewing relationship classifications at the outset, you can avoid having these assets turn into a liability.
This spring, the California Supreme Court issued a landmark decision in Dynamex Operations West, Inc. v. Superior Court that has far-reaching consequences for nearly all industries in California. The Dynamex ruling established a new test to determine if a worker is an independent contractor or an employee in California. Because the law treats employees and contractors differently, misclassifying an employee as an independent contractor can result in steep penalties and even criminal charges in certain circumstances. It is therefore extremely important that breweries throughout the state closely review any independent contractor relationships to be sure they meet the new test.
Put It to the Test
Before Dynamex, California employers applied a flexible, multi-factor common law test for nearly three decades to determine whether a worker was an independent contractor. Now, California employers must apply a strict new “ABC test” for all questions under the California Wage Orders, which govern the vast majority of wage and hour questions in California. This includes overtime, minimum wage, overtime exemptions, meal and rest breaks, and recordkeeping requirements, among other topics.
To properly classify a worker as an independent contractor under the new ABC test, the business must be able to prove each of the following three factors:
- 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;
- that the worker performs work that is outside the usual course of the hiring entities business; and
- that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
Conspicuously absent from the test is worker preference. There are workers in industries and professions across the board who request to be paid on a 1099 basis as an independent contractor instead of as a W-2 employee. But the workers’ preference and the existence of a written contract between the parties is not determinative. As you will see, application of the test to seemingly simple scenarios, however, can be tricky.
Factor A: Freedom from Control
The first factor in the ABC test addresses the freedom and independence of the individual in performing the work. Whereas a business can exercise control over its employees, independent contractors must be, well, independent.
To show that the worker is free from control, the business must show that the worker has control over when and where to perform the work and also how to do so. This can be a difficult element to prove. For example, a children’s clothing company in Vermont (which also uses the ABC test), was unable to prove freedom from control over knitters who worked from home and set their own hours because the clothing company provided the clothing patterns and dictated how the product was to be knit.
As a brewery, you might hire a web designer to set up your website. To determine if that web designer is free from your control, consider where the web designer can work, who determines when and how long he or she works, and who determines what method of coding he or she uses. Consider as well what other direction you are giving the web designer. Any micromanagement—and potentially any management at all—could demonstrate a lack of freedom from control over the worker.
Factor B: Work Outside the Usual Course of Business
Under the second factor, the independent contractor must perform work that is unrelated to the hiring entities business. This factor significantly impacts many types of businesses, like the “gig economy” which depends on the use of independent contractors as a business model.
In the brewery setting, a handyman who performs repairs to your tasting room would meet this factor because a brewery is not in the business of construction or building repair. The same would go for an electrician, or a janitor—any worker who is not involved in the making, selling, or distribution of beer.
As for specialized technical work within an isolated function of an employer’s business, however, the court said these are not among the types of jobs that would typically qualify as independent contractors. This could include your brewery’s contract accountant, truck drivers, IT workers, or high-level managers with special skills. This is significant because these jobs have historically fallen within a gray area. This prong of the test could create differing opinions among courts attempting to interpret the new law.
Factor C: Independently Established Trade, Occupation or Business
The third factor in the ABC test looks at whether the purported independent contractor actually operates his or her own business. It is not enough under this factor, for the brewery to merely permit the worker to perform similar work for other companies. Rather, the worker must actually engage in an independently established trade, occupation or business of the same nature as the work they are performing for your brewery.
Under this factor, a friendly hobbyist who offers to help you out may not be worth the risk. For example, your neighbor Bob, who works as an insurance-salesperson by day, is also a Mr. Fix-it when it comes to household repairs. So when the tasting room sink springs a leak, Bob offers to check it out for cheap. He does so on his own time, with little-to-no instruction from you, so prong A of the test is met. Because plumbing is not within the brewery’s usual course of business, prong B should also not be a problem. Prong C, however, poses a challenge under the new test. Be very careful with regard to engaging any independent contractors going forward, especially workers like Bob, who work as single individuals rather than for a company in an independent business. Because Bob does not operate or work for an independent plumbing business, you cannot meet prong C in the rigid ABC test.
So What Now?
A worker in California can only be properly classified as an independent contractor if you can meet each of the three ABC factors. If in doubt, it is better to err on the side of caution and classify the worker as an employee.
If you do decide to classify certain workers as independent contractors, you should take precautions to protect the brewery and demonstrate that you considered and believe you can prove all three factors. For example, keep documents to prove that the contractor really isn’t an employee. Don’t ask the contractor to complete your standard employment application. Instead, ask the contractor for documents that will enable you to establish that he or she is a separate business entity such as business cards, business or professional licenses, proof of insurance, etc. Be sure to document each of the factors you reviewed in making the contractor determination. Some other protections for your brewery include the following:
- Don’t limit who else the independent contractor can work for.
- Consider why and how the independent contractor’s work is outside the scope of the brewery’s business.
- Allow the independent contractor to use his or her own tools.
- Allow the independent contractor to set his or her own schedule.
- Allow the independent contractor to determine the method and means through which he or she performs the work.
- Work with an attorney to draft or review any contract you enter into with the contractor.
Ultimately, independent contractor status should be limited to those who are truly independent from your brewery. Those who make and sell your beer are some of your biggest assets. By reviewing relationship classifications at the outset, you can avoid having these assets turn into a liability.”
For more information:
http://www.mondaq.com/article.asp?articleid=730134&email_access=on&chk=1976992&q=1246858
Until Next Time, Be Audit-Secure!
Lisa Smith
