Decision Muddies Water For Employee/Contractor Determinations

Decision Muddies Water For Employee/Contractor Determinations

Two Standards

The California Supreme Court has effectively created two different standards for determining proper classification – one for wage and hour issues and another for determining whether a worker is an employee for workers’ comp coverage.

The decision makes it easier for more independent contractors to be considered employees for wage and hour purposes under California law, but not necessarily for workers’ comp purposes.

The existing law for workers’ comp is for the moment unchanged. The dual approach, however, has the potential to create confusion during payroll audits when not all “employees” will be counted for workers’ comp premium calculations. An employers’ DE-3 Report to the Employment Development Department of payroll may no longer be a determinant factor in workers’ comp audits.

Additionally, independent contractors who are now being paid per the wage and hour laws might ‘mistakenly’ file a claim for workers’ comp benefits if they are injured on the job, which would generate a dispute before the Workers’ Compensation Appeals Board.

Repeating – there are now two different standards, one for qualifying a worker for wage and hour purposes – putting them on the payroll, and one for qualifying a worker to be covered under workers comp.

Here’s How It Works

In a unanimous decision, California’s Supreme Court adopted a simpler three-prong test to differentiate between employees and independent contractors but only “for purposes of California wage orders,” the court emphasized in its decision in Dynamex Operations West, Inc. v. Superior Court Los Angeles County/Charles Lee. The decision came in a wage dispute following Dynamex’s transfer of its workforce from W-2 employees to 1099 independent contractors.

The “ABC Test” adopted by the court provides that a worker is properly considered an independent contractor for wage order purposes if the hiring entity can show that:

  1. The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
  2. The worker performs work that is outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

If the hiring entity is unable to show each of these tests to be true, then the worker is considered an employee for purposes of the wage order. California’s wage orders govern hourly pay, meal and rest breaks and overtime issues among other items.

This simplified test is already used by other states including New Jersey and Massachusetts. The test put forth by the California Supreme Court is the Massachusetts version.

Issues for Comp

While the Dynamex decision ushers in a new era for determining employee status for pay issues, the key law for workers’ compensation issues is still the 29-year-old decision in Borello v. Department of Industrial Relations. This dichotomy was not lost on the Dynamex court.

“The fact is that you have a test now that governs one set of employment relations and a test now that governs another set and to the extent that those two are not consistent you have the opportunity of someone legitimately saying this person is not an employee for workers’ comp purposes even though I’m paying wages,” says Mark Webb of Prop 23 Advisors. “The Court seems to acknowledge pretty clearly that you can have separate standards for separate public policy purposes.”

The Borello decision, which is used by the Workers’ Compensation Appeals Board in coverage disputes, uses a “multi-factor” or “economic realities” test to differentiate between independent contractors and employees.

The Borello test includes a number of factors to consider but at its heart the issue is whether the person to whom service is given controls or has the right to control what work is done and the way it is performed. Secondary considerations include:

  • Whether the one performing services is engaged in a distinct occupation or business;
  • The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
    •    The skill required in the particular occupation;
    •    Whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;
    •    The length of time for which the services are to be performed;
    •    The method of payment, whether by the time or by the job;
    •    Whether or not the work is a part of the regular business of the principal; and
    •    Whether or not the parties believe they are creating the relationship of employer-employee.

While Borello is still controlling for workers’ comp purposes, the Dynamex court left open the possibility that this simpler ABC test could be expanded in the future.

“There is a footnote in which the Court notes it is leaving to another day the issue of whether the Dynamex holding could apply outside the wage order setting. It noted the plaintiffs failed to appeal, or preserve on appeal, any issue of the wage order standards applying to a claim for indemnification of business expenses under Labor Code Section 2802,” notes attorney William Armstrong. “What I think we can say is the extent to which Dynamex may or may not, eventually seep into and apply in the workers’ compensation setting is unclear. At present, it does not. Borello is controlling. The footnote, however, suggests that issue is not closed.”

Copies of the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court Los Angeles County/Charles Lee are available in our Resources section or by clicking here.

Credit: WCExec

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