This article originally appeared on our sister site, Remodeling.
Business is booming. Employees are hard to find. Alternatives are being used, like keeping a favored subcontractor working for your company full-time.
Watch out. A recent decision by California’s Supreme Court focuses on three criteria to determine whether someone is an employee. And while this case affects only employers in California, the court’s so-called ABC Test could inspire changes in other states.
Pool and Spa News, a California-based sister publication to REMODELING, did a good job summarizing the court decision, Dynamex Operations West vs. Superior Court of Los Angeles County. The court defined the ABC Test this way:
A worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes: (A) that 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; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that 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.
The Pool and Spa News article goes on to describe how an employer would comply with (B) and (C):
Criteria B and C will pose tough hurdles for companies to clear. For B, the court posed the following question: Does the worker perform work that is outside the usual course of the hiring entity’s business?
For this question, the court compares two situations: A retail store that contracts a plumber to repair a leak versus a clothing manufacturer that uses work-at-home seamstresses. In the first example, the plumber performs a job completely different from that of the retailer. “In the latter settings,” the court said, “the workers’ role within the hiring entity’s usual business operations is more like that of an employee than that of an independent contractor.”
Further, it said, “… a hiring entity must establish that the worker performs work that is outside the usual course of its business in order to satisfy part B of the ABC test.”
For criterion C, the court poses the following question: “Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity? A true independent contractor, the court said, bears that designation by his or her own doing, not by the employer’s. Such a person has made the choice to start a business and takes steps to promote it, such as incorporating, gaining licenses, and advertising his or her services. Pool and Spa News quoted the court as declaring:
When a worker has not independently decided to engage in an independently established business but instead is simply designated an independent contractor by the unilateral action of a hiring entity, there is a substantial risk that the hiring business is attempting to evade the demands of an applicable wage order through misclassification. … In order to satisfy part C of the ABC test, the hiring entity must prove that the worker is customarily engaged in an independently established trade, occupation, or business.
Wow. That’s a bit complicated, but it’s more clearly laid out than I have ever seen the issue described.
What are the consequences of not complying? According to Pool and Spa News: “For each reclassified worker, employers must begin to pay Social Security taxes, federal unemployment insurance, and workers compensation, as well as complying with minimum wage laws and offering break times and other benefits.”
That would be quite a hit, particularly if the status of the worker was non-complying for some time.
What to do? Read the entire article and bring it with you when you meet with your accountant and lawyer. Focus attention on this sooner than later. Better to be dealing with it proactively instead of reactively.
Business is booming. Don’t let this issue make your success get busted apart.
