When a company needs work done, they can either hire a new employee to fill a position or bring in an independent contractor to work temporarily. Before April 30th of last year, this decision was primarily based on the time specifications of the work. Now, however, after the California Supreme Court case: Dynamex Operations West, Inc. v. Superior Court of Los Angeles, the dynamics of IC contracts have completely shifted.
In 2004, Dynamex, a same-day courier service company, decided to cut costs by converting all their employee drivers to independent contractors. Doing so, left their ex-employees in a bind—to continue working with fewer employee benefits and protections or to sue for misclassification of independent contractors. They chose the latter.
After 14 years in the judiciary process, going through both the Court of Appeals and the California Supreme Court, the result is in Dynamex unfairly misclassified its workers. What effect does this decision have on California businesses and owner-operators in general? Read on to find out.
Why Employers Classify Their Employees as Independent Contractors
To begin with, the initial question that arises is why an employer would classify an employee as an independent contractor. Why, for example, would a food delivery service choose to have ICs instead of employees? The reason is that employees are significantly more expensive:
Employers need to pay payroll taxes
Minimum wage laws and overtime apply to employees
Employees must be reimbursed for incurred business expenses
Independent contractors don’t receive required meal periods or rest breaks
ICs are usually not offered insurance, disability, or social security
As you can imagine, employers have plenty of incentive to reduce their bottom line by using independent contractors.
From Borello to ABC: Contractor or Employee
Prior to the Dynamex court decision, the way that employers determined whether someone working for them was an employee or an independent contractor depended on the Borello test. The principal factor was: if the working person had control over the manner and means of accomplishing the desired task, then they would be classified as an IC.
Basically, if the person controlled their hours, their work methodology, and could refuse certain aspects of a job, they were an independent contractor. If these were all determined by an employer, they were an employee.
Note: This is a simplified explanation; there were nine variable factors that determined independent contractor status under the Borello test.
What followed from the court decision in 2018 was the development of a new test to determine IC status—the ABC test.
ABC Test
The immediate implication of the ABC test was to make it harder for companies to establish independent contractor status. The burden of proof, so to speak, was on the employer. The three factors to prove were:
A) Free From Control – Workers must be free from the control of the hiring entity when it comes to the performance of the work while under contract.
B) Work Outside Business – Workers must perform work that the hiring entity’s business does not focus on.
C) Establish Independence – Worker must be engaged in independent trade, occupation, and/or business.
Most of the complications for companies arise from Part B of the ABC test. For example, food delivery services would have a hard time convincing a judge that their “independent contractors” delivering food falls outside the purview of the overall business.
Effect on The Gig Economy
This places the most significant impact on businesses that partake in the gig economy. Companies from Uber to Doordash will have to determine whether their workers remain as independent contractors under the new ABC test—although it’s likely they won’t. This will put a strain on these tech giants, as switching from ICs to employees increases costs to employers by an estimated 25% to 40%.
Effect on Owner-Operators
Similarly, industries that have owner-operators working with independent contractors should expect to be affected. Trucking companies, in particular, are at significant risk. Not only are the fees for misclassification costly, but the additional costs of switching ICs to employees could mean an end to these small businesses.
To ensure you’re operating properly under the new ABC law, owner-operators need to audit their ICs internally.
TPIA Partners With Sheppard Mullin
Contending with statewide audits will be complex. These audits will come with intricate questionnaires designed to encapsulate the current employee-contractor standards and expose any irregularities in hires.
That’s why TPIA is partnering with Sheppard Mullin—to audit its client's IC contracts, DMV motor carrier permits, US DOT numbers, and more. Doing so will prevent up to hundreds of thousands of dollars in back taxes, penalties, and fines for their clients.
Dynamex Enforcement and Moving Into The Future
This new development in IC contracts could spell the end for owner-operators in the state of California. Time will tell on that one. For now, the most important task is to self-audit your independent contractors to determine whether they pass the ABC test.
Trucking Proud Insurance Agency considers the Dynamex decision one of the five key issues they advocate. The others include PAGA, CARB, piece rate, and overnight parking. Call TPIA if you believe Dynamex affects your business.
Sources:
California Department of Industrial Relations. Independent contractor versus employee. https://www.dir.ca.gov/dlse/FAQ_IndependentContractor.htm
Wired. A California Ruling Threatens the Gig Economy https://www.wired.com/story/a-california-ruling-threatens-the-gig-economy/
