New Laws Classifying Independent Contractors for the State of California; Do Your 1099s Pass?


California Adopts New Worker Classification Standard


OVERVIEW

California has adopted a new law that changes the process for determining whether a worker should be classified as an employee or independent contractor. The new law adopts the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (Dynamex).


The new standard for worker classification dictates that a worker is an employee if he or she provides labor or services for remuneration. The new law also shifts responsibility to employers to prove that independent contractors are classified correctly.

Finally, the law prohibits employers from reclassifying individuals who were employees on Jan. 1, 2019 as independent contractors.


ACTION STEPS

Given the wide impact of this rule, employers should:

Review any current independent contractor agreements and any related hiring procedures and policies; andTrain managers, supervisors, HR and other hiring personnel.


Background

Whether a worker is covered by a particular law or is entitled to receive a particular benefit often depends on whether he or she is an employee or an independent contractor. In general, employment benefits, labor laws and related taxes do not apply to independent contractors. The matter of worker classification as either an employee or independent contractor generally comes up when issues dealing with wages, unemployment and workers’ compensation benefits arise.


For nearly 30 years, California has used the multi-factor test set by the California Supreme Court in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (Borello) to determine whether an individual is an employee. The 11 factors set out by Borello focused primarily on the degree of control an employer has not only over the work but also over how a worker completes his or her responsibilities.


This standard was challenged in court, and in Dynamex the state Supreme Court replaced the multi-factor test with a simpler standard called the ABC test.


On Sept. 18, 2019, the California legislature adopted the Dynamex ABC test as the state standard for employee classification and expanded its scope to include matters related to the state’s:


Labor code;Wage orders (including overtime, meal periods, rest breaks and other wage and hour issues);Unemployment benefits; and Workers’ compensation laws.

The new law is scheduled to become effective on Jan. 1, 2020 and will apply retroactively in some situations.


A New Standard—The ABC Test

The ABC Dynamex test presumes that a worker is an employee, unless the employer can prove that the worker:

A. Is free from the control and direction of the employer when performing work, both practically and in the contractual agreement between the parties;

B. Performs work that is outside the usual course of the employer’s business; and

C. Is culturally engaged in an independently established trade, occupation or business of the same nature as the work performed for the employer.


There are many exemptions to this new ABC Test and the wording can be a bit challenging. Contact your ERM Agent for more clarification (949) 222-0444

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