Employee Misclassification

Given the growth of the “gig economy” in recent years, a growing number of companies are relying less on employees and more on independent contractors. While hiring independent contractors affords companies and individuals greater flexibility, it also opens the door to potential abuses by employers.

Employees Versus Independent Contractors

Historically, most companies hired employees to perform all the necessary tasks related to the business. However, hiring an employee is expensive for a company because it must pay payroll taxes and often feels competitive pressure to provide employees with certain benefits, such as health and dental insurance. Moreover, employees are entitled to receive a minimum wage, and certain employees must be paid overtime wages. Employees are also covered by workers’ compensation insurance.

Independent contractors, on the other hand, are much less expensive for businesses to use. For example, a business can use independent contractors only when needed without worrying about paying for their benefits. While the use of independent contractors used to only be common in certain industries, that’s changed in recent years.

Recently, the California Supreme Court decided that its ruling in Dynamex Operations West, Inc. v. Superior Court applies retroactively. The Dynamex case set a new legal standard for determining a California worker’s employee classification. Before the decision, businesses relied on a judicial “right to control” test for classifying workers under California’s Wage Orders. California Wage Orders regulate worker rest breaks, meal periods, and overtime. In line with several other states, the court replaced the “right to control” test, with the stringent “ABC” test.

Under the new legal standard, California wage orders carry a presumption that any worker performing work for a business is an employee. As such, the law entitles these employees to the protection set forth by California Wage Orders. A hiring entity can only overcome the presumption if they can prove three elements:

That the worker is free from the control and direction of the hiring entity, related to the worker’s performance and in connection with the parties’ contract;
The worker is engaged in work outside the hiring entity’s usual course of business; and
The worker is routinely engaged in an independently established trade, occupation or business, of the same nature as the work performed for the hirer.

Articles Posted in Employee Misclassification

The Difference Between an Employee and an Independent Contractor Under California Employment Laws

Court Finds Dynamex Ruling Applies Retroactively in California Employment Case