California Supreme Court Changes Definition of Independent Contractor
The California Supreme Court recently decided how to distinguish a contractor from an employee for the Golden State’s employers.
The decision is called Dynamex decision. The California Supreme Court decision can be found here. For the legal diehards, the decision is 85+ pages.
However, I do recommend downloading it and reading over it as “what happens in California’s Workers Comp system will be coming to your state or states in the future.” <<<saying that I coined>>>
Many articles have been written in this blog that centers around the IRS definition of an independent contractor. The IRS has not updated the subcontractor pages since April 2018. We watch to see when the contractor pages are updated to pass them along to our readers.
California’s former rules and laws on subcontractors vs. employees seemed to be more liberal on allowing companies to operate as independent contractors. California’s gig economy remains massive and still growing.
According to Workcompcentral.com, (behind paywall) the high court in the Dynamex created a three-part test:
- Requires businesses to show that a person who is classified as an independent contractor is free from control and direction
- Was hired to provide a service that the company doesn’t usually offer
- Is customarily engaged in an independently established trade.
The decision seems more restrictive than what California had in place. The second part of the test (bolded above) creates a new wrinkle in the employment determination.
For comparison, the most update IRS determination is (with links that explain each aspect):
Facts that provide evidence of the degree of control and independence fall into three categories:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Businesses must weigh all these factors when determining whether a worker is an employee or an independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “make” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors that are relevant in one situation may not be relevant in another.
The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.
Even the IRS says there is no “magic way” to determine the employee/subcontractor relationship. The California Legislature will likely review in their next session the likely effects of this recent California Supreme Court decision.
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