Employee vs. Independent Contractor

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Did California Make It Illegal For Truck Drivers To Be Independent Contractors?

California’s governor, Gavin Newsom, recently signed into law AB 5 – the bill that would codify the “ABC test” and make most workers employees if they perform the same services for a business that the business provides to its customers. For example, Uber and Lyft drivers perform the transportation services those companies provide to their customers. Under the ABC test, these drivers must be classified as employees. [UPDATE (11/2020): Following passage of Prop 22 drivers for app based driving services, including Uber and Lyft, will be independent contractors]

This is, of course, a major concern for trucking companies that hire owner-operator drivers as independent contractors. If you are a trucking company, the people that drive trucks for you will be your employees under the new law. So does that make the owner-operator model illegal? Not necessarily.

In Alvarez v. XPO Logistics Cartage, (C.D. Cal. Nov. 15, 2018), the defendant challenged the ABC test on the grounds that it was preempted by the Federal Aviation Administration Authorization Act (“FAAAA”). The FAAAA provides that states “may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of any motor carrier.” The Federal District court agreed, and found the ABC test preempted.

Here, the question is not whether the FAAAA preempts California wage orders; rather, it is whether the ABC test—used to interpret the wage orders—is preempted. … [W]hile the Ninth Circuit declined to affirmatively address whether the ABC test was preempted by the FAAAA, it nevertheless distinguished the two standards, noting that “the ABC test may effectively compel a motor carrier to use employees for certain services because, under the ABC test, a worker providing a service within an employer’s usual course of business will never be considered an independent contractor.” The Court agrees with this dicta and finds that the ABC test—as adopted by the California Supreme Court—”relates” to a motor carrier’s services in more than a “tenous” manner and is therefore preempted by the FAAAA.

So does that settle the matter? Unfortunately, no. Other Federal courts have come to the opposite conclusion on the same issue, and it will thus need to be resolved by the Ninth Circuit and possibly the U.S. Supreme Court.

Dynamex and AB 5: The New ABC Test for Independent Contractor Status

Last year, in the case of Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903 (Dynamex), the California Supreme Court adopted the “ABC test” to determine whether a worker was an employee or independent contractor. Under the ABC test, a person hired to provide labor or services shall be considered an employee unless the hiring entity demonstrates that all of the following conditions are satisfied:

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

The decision considerably expanded the traditional test, and made it much easier for a worker to claim employment-related protections.

Following the Dynamex ruling, the California Assembly introduced AB 5, which aims to codify the rule in Dynamex. As it stands now, AB 5 has passed the Assembly and will likely pass the Senate this month.

The bill adds Section 2750.3 to the Labor Code, which begins by making the ABC test the default standard. The interesting part of the bill, however, lies in the exemptions to this test. When applicable, these exemptions would still allow a worker to prove employment under the old rules, but exempt workers could not take advantage of the very easy ABC test.

Subdivision (b), for example, exempts most licensed professions, e.g. doctors, dentists, lawyers, accountants, insurance brokers, etc. Not too surprising.

Subdivision (c) exempts contracts for “professional services” if they meet certain conditions. As defined, the term “professional services” includes marketing, human resources administration, travel agent services, graphic design, grant writing, “fine artists,” enrolled agents licensed by the IRS, freelance writers and photographers, and licensed cosmetologists.

It is no surprise that freelance writers and photographers would be exempted from the Dynamex test. It will be interesting to see how the term “fine artist” is applied If this becomes law. Do bands or DJs performing at clubs qualify as “fine artists?” What about magicians or exotic dancers? What exactly is “fine art?”

Another carve out comes in Subdivision (e) which exempts workers in “a bona fide business-to-business contracting relationship, as defined below, under the following conditions:”

(1) If a business entity formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation (“business service provider”) contracts to provide services to another such business (“contracting business”), the determination of employee or independent contractor status of the business services provider shall be governed by Borello, if the contracting business demonstrates that all of the following criteria are satisfied…

On its face, this exemption seems directed at business consultants. However, the language is broad enough to exempt a wide range of workers. Strangely, even though it applies to “sole proprietorships,” the exemption “does not apply to an individual worker, as opposed to a business entity, who performs labor or services for a contracting business.” Many individual workers are, by definition, also sole proprietors if they have not incorporated their business.

UPDATE: AB 5 has passed the Senate and has been signed into law by the Governor.

Yes, You Can Appeal A CUIAB Decision That Your Independent Contractor Is An Employee

Independent contractors, unlike employees, are not entitled to claim unemployment insurance. But if a worker believes she was wrongfully classified as independent contractor, instead of an employee, she can file a claim for unemployment.

Normally, if an employer disagrees with the decision of the California Unemployment Insurance Appeals Board (CUIAB), it may appeal the decision by filing a writ of mandate. However, if the decision requires the employer to pay a tax, it cannot appeal or challenge the decision until the tax is paid, pursuant to California Constitution, article XIII, section 32.

In West Hollywood v. CUIAB, (2014) 232 Cal.App.4th 12, the Court of Appeal considered whether the hirer may appeal a CUIAB decision that an independent contractor is in fact an employee (and thus owed unemployment benefits). The court rejected CUIAB’s argument the decision could not be appealed pursuant to Section 32 because it required payment of a tax.

This appeal requires us to consider whether an employer may obtain judicial review of a decision from the California Unemployment Insurance Appeals Board (the Board) finding that an applicant for unemployment benefits was an employee, not an independent contractor. The Board argues that decision is not subject to judicial review because both the California Constitution and the Unemployment Insurance Code bar actions whose purpose is to prevent the collection of state taxes. Appellant recognizes that actions seeking to avoid a tax are prohibited, but argues that this case does not challenge the imposition of a tax. We agree with appellant and reverse the judgment.

First, the Board acknowledges that “the charge to Voda Spa’s reserve account resulting from benefits awarded to Serban is not a tax payment within the meaning of article XIII, section 32 or section 1851. The only effect of the charge, is the likelihood that Voda Spa’s future reserve ratio will decrease, resulting in a higher future contribution rate.” … Because there was no assessment in this case, the pay now, litigate later rule, is simply inapplicable.