New California Independent Contractor Law Takes Effect January 1

Several months ago, the California Supreme Court established a new test for determining whether a worker should be classified as an employee or an independent contractor. Now that test will be enshrined in law on January 1, 2020, as the California legislature has passed AB-5.

Here is the standard classification test under the new law:

A worker will be considered an employee, rather than an independent contractor, unless the hiring entity can demonstrate all of the following:

  1. The person 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 work and in fact
  2. The person performs work that is outside the usual course of the hiring entity’s business
  3. The person is customarily engaged in an independently-established trade, occupation, or business of the same nature as that involved in the work performed

A couple of points are worthy of emphasis. First, the presumption is that a worker is an employee. That is the default classification. Second, as I pointed out in my earlier post on the subject, a lot of companies are going to get hung up on the second prong – that the worker must be performing work outside of the usual course of the hiring entity’s business. So delivery companies like Fedex and UPS are going to have a hard time classifying delivery drivers as contractors, and software companies like Google and Facebook are going to have a hard time classifying software developers as contractors.

As you might expect, the lobbyists were working hard on this bill, and there are a lot of exceptions. One of the biggest exceptions is for business-to-business contracting relationships. The standard test will not apply if all of the following are satisfied:

  1. The business service provider is free from the control and direction of the contracting business in connection with the performance of the work, both under the contract for the work and in fact;
  2. The service provider is providing services directly to the contracting business, rather than to customers of the contracting business;
  3. The contract is in writing;
  4. If the work is performed in a jurisdiction that requires the service provider to have a business license or business tax registration, the service provider has the required license or tax registration;
  5. The service provider maintains a business location that is separate from the business or work location of the contracting business;
  6. The service provider is customarily engaged in an independently-established business of the same nature as that involved in the work performed;
  7. The service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity;
  8. The service provider advertises and holds itself out to the public as available to provide the same or similar services;
  9. The service provider provides its own tools, vehicles, and equipment to perform the services;
  10. The service provider can negotiate its own rates; and
  11. Consistent with the nature of the work, the service provider can set its own hours and location of work.

Finally, there are a number of exemptions based on occupation. Here are some examples:

  1. Physicians, surgeons, dentists, podiatrists, psychologists, veterinarians
  2. Lawyers, architects, engineers, private investigators, accountants
  3. Securities broker-dealers or investment advisors
  4. Direct sales salespersons
  5. Certain professional services – marketing, human resources administrators, travel agents, graphics design, grant writers, payment processing agents, licensed estheticians, licensed electrologists, licensed manicurists, licensed barbers, licensed cosmetologists, freelance writers

Please note that for some of these occupation-based exemptions, there are additional requirements that must be met. If you need further information on how a worker should be classified, please contact us.



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California Adopts New Independent Contractor Test

In a recent case, the California Supreme Court adopted a new standard for determining when a worker is an independent contractor, and when a worker is an employee. This is a major departure from how workers have been classified in the past, and will have far-reaching effects on employment and the gig economy.

The case, Dynamex Operations West, Inc. vs. Superior Court, involved delivery drivers for a parcel delivery company. Under the new, 3-factor “ABC” test adopted by the Court, a worker is presumed to be an employee, and will only be considered an independent contractor if:

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 and in fact;
2. The worker is performing work that is outside the usual course of the hirer’s business; and
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work being performed.

All three factors must be satisfied, or the worker will be re-classified as an employee. In adopting the new ABC test, the Court abandoned the traditional “right to control” test, which looked at numerous indicators of control, none of which was dispositive.

To see how this new test will play out, let’s look at an example of a software company that engages software developers, but wants to classify them as contractors. The company may tell the developer that it needs software in place to protect data security from hackers. The company may not give the developer any directions as to how to write the code for that software, and may not require the developer to do the work onsite, which may satisfy the first part of the ABC test. Also, the developer may be doing a lot of freelancing in the area of data security for different companies, satisfying the third part of the test. The problem is the second part. If the company is a software company, then software development could very likely be considered within the usual course of its business. The same analysis might apply to a package delivery company that wants to classify its delivery persons as contractors. On the other hand, a retail clothing chain that hires a software developer to work on its customer database may have a better chance of classifying that developer as a contractor.

Consequently, companies in California that use contractors need to take a hard look at how the relationship is set up. It is quite likely that under the new ABC test, many of those contractors will need to be reclassified as employees.

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Does Your Uber Driver Make Any Money?

Today one of my twitter followers, and someone I actually know from the startup community here in Cincinnati, posted an interesting tweet:

“I always open up my @Uber/@lyft email receipts, wincing at the long ride I took, thinking it’ll be $20. It’s consistently less than $9. [celebratory emoticon]

The tweet got me thinking about whether this is actually something to celebrate. You see, I had just read an article in the New York Times about Lyft’s attempt to find a buyer, and had come across this bit of information:

“Companies like Lyft and Uber typically take 20 percent to 25 percent of the cost of each ride.”

That means that for my friend’s $9 drives, Uber and Lyft are typically taking out $1.80 to $2.25. To keep things simple, we’ll split the difference and say that they take out $2, leaving the driver with $7. As you may know, the people that drive for these companies provide their own cars and vans, and have to pay for their own gas and maintenance. My friend is in LA, and the average price of a gallon of regular gasoline today is $2.68, according to the LA Times. That comes out of the $7 left to the driver after Uber or Lyft have taken their cut. If the driver has to use half a gallon to pick up my friend and get her to her destination, that means $1.34 should be deducted from the $7. So the driver has netted a grand total of $5.66 on this gig, and that doesn’t take into account maintenance and depreciation on the car.

Still cause for celebration? That cheap ride is great for the passenger, but is the driver making any money? Perhaps there is a reason for the regulated rates that taxis charge – these rates ensure that the drivers can actually make money driving a taxi.

Is Your Contractor Really An Employee?

If you weren’t distracted by Donald Trump throwing his comb-around into the presidential ring this week, you might have noticed that the California Labor Commission ruled that an Uber driver was an employee, rather than an independent contractor. This meant she was entitled to approximately $4000 in expenses and other costs incurred while driving for Uber. While the Labor Commission’s ruling only applies to the one employee, it is still worth taking a look at the case, for several reasons.

First, the ruling may encourage other Uber drivers to file claims, something that’s relatively easy to do in California. Second, the Labor Commission stated reasons for its ruling, which will be useful in some class action suits that are in process.

The most important reason you should be paying attention, however, is that the ruling has broader implications for companies in general, and “on-demand” startups in particular. A lot of companies are trying to cut their HR overhead by classifying workers as “independent contractors,” rather than as “employees.” By doing so, they hope to avoid dealing with employment taxes, overtime rules, and paying benefits. I’m not just talking about small companies and startups like Taskrabbit, mind you. Fedex has been trying it, too, saying that its drivers – you know, the guys who wear Fedex uniforms and drive Fedex trucks and deliver Fedex packages on Fedex routes during Fedex hours – aren’t really employees. The Ninth Circuit Court of Appeals ruled last August that Fedex drivers in Oregon and California could move forward with lawsuits claiming they were incorrectly classified.

The key in these cases, and in employment law in general, is the degree of control that the company has over the worker. While there is no single formula, there are a number of different factors that courts and labor commissions look at. Essentially, the more control over the worker that the company has, the more likely the worker is an employee, not a contractor. Control can be shown through requiring uniforms, providing equipment or tools for the job (like computers, trucks, etc.), setting work hours, requiring the worker to operate from a set location, and setting rules for how the worker does the job, among various other factors. Consequently, it’s important for companies to carefully evaluate what they expect from workers, and the degree of control they need over such workers, before just classifying someone as a contractor. Taking the time to structure the relationship properly can save a company a great deal of money and headaches, if a worker tries to challenge the classification.

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VC Lawsuit Highlights Need for Discrimination Policies

Head in HandsIf you follow the worlds of startups and venture capital, you have probably heard of the sex discrimination lawsuit that Ellen Pao has filed against her former employer, the prestigious venture capital firm Kleiner Perkins Caufield & Byers. While there are all sorts of interesting details in the case, one item leapt out at me from an article in today’s New York Times covering the trial:

“Yet even allowing for the fact that all the witnesses so far were called by Ms. Pao’s team, documents and testimony in the trial show a firm whose attitudes derived from an earlier era. When Mr. Hirschfeld asked for a copy of Kleiner’s manual on discrimination, it could not be found.”

Mr. Hirschfeld was the independent investigator hired by Kleiner Perkins to look into Ms. Pao’s allegations. Kleiner Perkins isn’t a new company, mind you. It was founded in 1972. And it’s not cash-strapped, either. KPCB is one of the most successful VC firms in the world, and has made billions of dollars off of investments in companies such as, AOL, Google, Intuit, and Electronic Arts. So the company has clearly had the time and the resources to put together an anti-discrimination policy. If it has one, however, nobody seems to know where it is. No wonder they are getting sued for sex discrimination! And no wonder the tech industry that KPCB has nurtured for more than 40 years has a problem with discrimination towards women.

So what’s the lesson here, especially for tech startups? First of all, don’t wait for 40 years, or until you get sued, to start thinking about anti-discrimination policies. The time to create an anti-discrimination policy is when you hire your first employee. Second, don’t create a policy and then stick it in the back of a file cabinet or in a box in the closet where you keep the cleaning supplies. Use the policy. Teach it to new and existing employees. Update it at least once a year. Make it a part of your culture, even more than free snacks or bringing your dog to work or unlimited vacation time.

That’s really the most important takeaway: make your anti-discrimination policy an essential part of your company culture, from Day One.

Follow me on Twitter @PaulHSpitz