The US Department of Labor recently issued an opinion letter stating that workers finding work through a gig-economy platform are independent contractors, rather than employees. Earlier this week, I posted about that on LinkedIn.
The DOL’s opinion letter is not law. It does provide excellent guidance on how the federal agency enforcing the Fair Labor Standards Act would interpret a similar situation, and many businesses find that encouraging. With that said, however, the IRS applies its own test (and using 20 factors). Then there are state laws. You see, states can impose additional criteria that can result in even fewer people qualifying as independent contractors. That means that in states with stricter worker classification standards, more workers will be employees, entitled to minimum wage and overtime among other protections — even if they would qualify as independent contractors under federal laws.
A number of states have adopted an “ABC” test, but even those tests can vary from one state to another, even if only in seemingly small and subtle ways. This week, a large franchise had to deal with a significant setback, in that it will have to show that its workers meet California’s ABC test or it will have to pay the consequences of misclassification of its workers. The case is Vazquez v Jan-Pro Franchising International, but really the story begins with a prior case, so I’ll start with that.
So here’s what went down. Last year, specifically April 30, 2018, the California Supreme Court handed down a long-awaited ruling , that many felt significantly changed California’s method of determining whether workers are independent contractors or employees, for purposes of wage orders adopted by CA’s Industrial Welfare Commission (IWC). That case was Dynamex Corporations West, Inc v Superior Court, and there the court ruled that entities in California that classify workers as independent contractors must, prove that all 3 factors of the following “ABC” are met:
(A) 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 the performance of the work and in fact; and
(B) the worker performs work that is outside the usual course of the hiring entity’s business; and
(C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
While Dynamex established a new test in California it left one particular question unanswered: when does the new test go into effect– or more specifically, does it apply retroactively?
Enter Jan-Pro Franchising International, an international janitorial cleaning service that found itself facing claims that it misclassified its janitors as independent contractors as part of its ‘three-tier’ franchising model. The US District Court (aka the federal trial court) dismissed the claim on a summary judgment motion. The workers appealed to the 9th Circuit, and while that appeal was pending, the California Supreme Court issued its ruling in Dynamex. The 9th Circuit therefore required briefs from the parties on what effect Dynamex had or should have on the merits of their case. Naturally Jan-Pro argued that under the circumstances, Dynamex should not apply retroactively. The 9th Circuit however, didn’t see it that way. According to the court, Dynamex was neither new law nor a departure in any way from existing law. The court, reasoning that Dynamex was merely “clarifying” existing law, and consequently applied to the case at hand, therefore remanded the case to the District Court for further proceedings consistent with its ruling. In other words, the District Court is to apply the ABC test retroactively to Jan-Pro’s janitorial workers.
So here’s the chief takeaway: Don’t base conclusions about your worker classifications solely on US Department of Labor interpretations or federal laws. Check the laws of the state(s) in which you have people working. Some states issue additional, stricter requirements and the fact that you are in compliance with federal law often will not save you in those circumstances. So if you hire workers in California, now you know your ABC’s…
Contents of this post are for educational/informational purposes only, are not legal advice, and do not create an attorney-client relationship. Consult with competent employment counsel in the state(s) in which you employ people with your specific questions.
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