Do your hiring practices as a contractor pass the ABC Test put forth by the California Supreme Court?

On April 30th a unanimous ruling of Dynamex Operations West v. Superior Court of Los Angeles dramatically changed the factors used to determine an employee versus an independent contractor. While this specific ruling directly addressed wage and tax obligations for an employee, it was left vague enough to influence the worker’s compensation exemptions that contractors use. Contractors avoiding workers compensation and other employment obligations by hiring subcontractors may no longer be able to do so.

Employee definitions changed based on this Supreme Court ruling and the burden of proof shifts from courts or government agencies to the contractor. If you are wondering if the 1099 subcontractor you hired should be considered an employee, then go through the ABC test.

If your subcontractor doesn’t pass these three conditions that subcontractor should be an employee and managed as such:

(A) that the worker being hired is free from the control and direction of your company in connection with the performance of the work, both under the contract for the performance of the work and in fact.

(B) that the worker performs work that is OUTSIDE the usual course of your business operations.

(C) that the worker is customarily engaged in an independently established trade, occupation, or business.

It is important to note that all of the ABCs need to be met in order to prove the person you hired should not be classified as an employee.

Using the newly created ABC test to determine if workers are independent contractors will protect your business. There are numerous wage & hour penalties for unpaid wages, unpaid overtime, missed meal and rest breaks a contractor can be liable for. There is also potential for huge civil penalties under the Labor Code section 226.8, which states, “it is unlawful to misclassify an individual as an independent contractor.” Civil penalties for this Labor Code violation can range from $5,000 up to $25,000 for each violation of this recent law.

A contractor’s greatest concern regarding this new ruling should be Worker’s Compensation requirements. Contractors failing to purchase and file Worker’s Compensation coverage once that worker is deemed an employee is a criminal offense. Section 3700.5 of the California Labor Code indicates that it is a misdemeanor, punishable by either a fine of not less than $10,000 or imprisonment in the county jail for up to one year, or both. The state of California also issues penalties of up to $100,000 against employers who are illegally uninsured.

Currently the CSLB and other labor agencies do not have new enforcement tactics in place to regulate this ruling. However, it is not beyond speculation to believe the CSLB or the Department of Labor will be creating a task force to ensure contractors are properly insuring their newly classified employees. How a violation will affect a contractor’s license status is the biggest concern. CCIS will be watching news flashes issued from the CSLB for future enforcement policy.