California Independent Contractor Law

by Jonathan Melmed on Jun. 04, 2020

Employment Employment  Employee Rights 

Summary: What workers should know about their employment rights as an independent contractor in California.

Across California, hundreds of thousands of people work as independent contractors every day. A business owner might hire a freelance web designer to create a new website, along with a freelance graphic designer to create a logo, and a freelance writer to create the website’s copy. Likewise, someone renovating their home might hire a contract worker to pour a new cement patio, as well as one to paint the exterior of their home. Many Californians enjoy working as independent contractors, as it allows workers the freedom to set their own hours, choose their own customers, and keep their own profits.

 

However, more recently, the “gig economy” has taken hold across the US and in California as one of the most common ways individuals are finding work. Companies such as Uber, Lyft, Instacart, and Postmates have built massive businesses from hiring drivers and delivery persons as independent “gig” workers, not employees. A traditional independent contractor has control over the work they do, including the rate they charge, the jobs they accept, the manner in which they work, and the manner in which they market and build their business. Many gig workers, on the other hand, may not control the price charged for their services nor the manner in which they do their work. Their work is, in fact, carefully controlled by the parent company for which they work, despite the fact that they lose out on the rights afforded California employees such as the right to overtime pay, minimum wages, and health care coverage. All too often, gig workers end up saddled with both the worst parts of being an independent contractor and of being an employee.

 

Gig work has left many workers feeling exploited, with corporations profiting heavily off their independent contractors while the workers themselves see little of those profits. In response, thousands of gig workers have joined together to file class-action lawsuits against these companies, seeking input from California courts on whether they are truly independent contractors or, in fact, should be treated as employees. 

 

Using the “ABC Test” to determine employee status

 

Due to concerns over gig workers’ rights, California lawmakers passed Assembly Bill 5, which entered into effect in January 2020. Essentially, AB-5 incorporated the test created by an important California Supreme Court decision, Dynamex Operations West, Inc. v. Superior Court, into to the California Labor Code. The test provides a guide for determining whether a worker should be classified as an employee or an independent contractor.

 

This test states that, in order to classify a worker as an independent contractor, the employer must prove all three of the following elements:

 

  1. 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 performance of the work and in fact.
    • What this means: An independent contractor must be able to control when or how they do their work, as well as to control the wage for which they work. Without this control, the worker should not be considered an independent contractor.
  2. The worker performs work that is outside the usual course of the hiring entity’s business.
    • What this means: The worker will not be considered an independent contractor if the type of work they do is central to the typical course of the hiring company’s business. If the company has an employee who does similar work to that of an independent contractor hired by the company, then this may mean that the independent contractor should also be classified as an employee. For example, a painter being hired to paint the walls of a retail store would likely be considered an independent contractor under the law, but a driver for a ride-sharing company would likely be considered an employee under this factor. This is the most hotly-debated factor of the ABC test. Rideshare companies Uber and Lyft have each refused to apply the law to their workforce, arguing that drivers are outside the usual course of their business. The State of California has recently filed a lawsuit against these companies for their failure to treat their workers as employees.
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
    • What this means: If the worker did not previously advertise themselves or accept jobs performing the type of work for which they were hired, this makes it less likely that the worker could be considered an independent contractor. Evidence to prove this factor could include the worker having created a corporation, obtaining a license to do the work, or advertising of these services to potential customers.

 

Perhaps most importantly, AB-5 establishes that, by default, California workers should be considered employees. Companies may only treat workers like independent contractors if the company can prove that the ABC test applies.

 

Companies that fail to treat workers who do not pass the ABC test as employees can face very serious penalties. Misclassifying workers can run employers between $5,000 and $25,000 per violation, fines which may be on top of unpaid overtime, minimum wage, or meal and rest break penalties that the employer may owe their workers. Workers who believe that they have been misclassified as independent contractors are strongly encouraged to contact a California employment attorney to find out about their rights under California wage and hour law. 

 

Certain workers are exempt from requirements of new law

 

AB-5 was written to apply to a broad number of California workers, but certain types of workers do not need to meet the ABC test in order to be classified as independent contractors. For example, many workers with professional licenses are exempt, such as certain insurance agents, securities broker-dealers, investment advisers, lawyers, engineers, and accountants. Additionally, a category of “professional services” workers were made exempt under the law, which include workers such as graphic designers, grant writers, fine artists, marketers, and estheticians. In many cases, these workers must meet a different test known as the Borello test to be considered employees under California law. A labor and employment attorney can help workers in these fields determine whether they may still be entitled to the benefits of employee status.

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