Many California business owners have used independent contractors in an effort to grow their businesses and keep cost down. Many businesses have used independent contractor arrangements in an effort to “retire” an employee such that the former employee will provide consulting agreements.
On April 30, 2018, the California Supreme Court issued its decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, in which it provided a 3 part test for independent contractors in California. The test provides that in order for an individual to be properly classified as an independent contractor the following conditions must be met:
(A) that 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) 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.
Parts B and C are where most businesses will struggle with this test. Further, except for situations where the applicable statute of limitations has been exhausted, Dynamex is retroactive. That’s right. You read correctly. Even if you properly paid your business counsel to follow the previous rules, if you fail Parts B and C, you are liable. A good business owner should know about these risks and find ways to mitigate the risks.
I have been lecturing on the Dynamex decision and (if you subscribe to the Garcia and Gurney blog, you will receive an invitation to our November 14th event on new employment laws) of those business owners and lawyers there is a lot of misinformation out there. I heard from a non-lawyer that he believed that this law “did not apply to him because he is in the business of transportation.” I explained to him that the Dynamex decision was about a transportation company and that he didn’t need anyone to sue him, he just needed to get audited by one of the government agencies. The governmental agencies share information and then come the penalties and interest on non-compliance. The important point from a business perspective is to examine your business model and do the analysis for each of your independent contractors. If you are bringing in a consultant to train your employees, we need to examine the nature of the consultant’s business, what the service offering is and if all other conditions have been met. But, as far as we can tell Dynamex is a huge issue for those businesses not protected by carve outs in statutes. Certain real estate professionals are carved out by statute. Surprisingly, some of the worst offenders are law firms. The use of contract attorneys is a long standing practice for large and small firms. However, under Dynamex, even if a lawyer is in a rare specialty practice, the law firm is still in the business of selling legal services and will fail under Dynamex. This is regardless of whether the contract attorney has other clients, has their own independent business license etc. Similarly, staffing companies, consulting companies, beauty salons, spas, and other businesses are at strong risk for violating this new law.
Dynamex is not the end of the world for businesses. I am recommending to all my clients and readers of this blog to meet with their employment counsel and to do an audit of the work force to mitigate risk. For most business owners, an employment attorney will make recommendations about how to be compliant and protect your business. But, for all businesses, we urge you to not ignore this new test because as with wage and hour issues, you will end up paying the employees now or you will pay them later and this is if the business is not hit with an EDD/Department of Labor/IRS audit first.