California Supreme Court Decision Independent Contractors Definition

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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.   

Postcard Graphic California Supreme Court Golden Gate Bridge
Public Domain – Tichnor Bros

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:

  1. Requires businesses to show that a person who is classified as an independent contractor is free from control and direction
  2. Was hired to provide a service that the company doesn’t usually offer
  3. 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):

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Common-Law Rules

Judge California Supreme Court Holding Gavel
by StockUnlimited

Facts that provide evidence of the degree of control and independence fall into three categories:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. 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.)
  3. 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. 

 

©J&L Risk Management Inc Copyright Notice

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James Moore

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Mgmt Consultants, Inc. in 1996. J&L’s mission is to reduce our clients’ Workers Compensation premiums by using time-tested techniques. J&L’s claims, premium, reserve and Experience Mod reviews have saved employers over $9.8 million in earned premiums over the last three years. J&L has saved numerous companies from bankruptcy proceedings as a result of insurance overpayments.

James has over 27 years of experience in insurance claims, audit, and underwriting, specializing in Workers’ Compensation. He has supervised, and managed the administration of Workers’ Compensation claims, and underwriting in over 45 states. His professional experience includes being the Director of Risk Management for the North Carolina School Boards Association. He created a very successful Workers’ Compensation Injury Rehabilitation Unit for school personnel.

James’s educational background, which centered on computer technology, culminated in earning a Masters of Business Administration (MBA); an Associate in Claims designation (AIC); and an Associate in Risk Management designation (ARM). He is a Chartered Financial Consultant (ChFC) and a licensed financial advisor. The NC Department of Insurance has certified him as an insurance instructor. He also possesses a Bachelors’ Degree in Actuarial Science.

LexisNexis has twice recognized his blog as one of the Top 25 Blogs on Workers’ Compensation. J&L has been listed in AM Best’s Preferred Providers Directory for Insurance Experts – Workers Compensation for over eight years. He recently won the prestigious Baucom Shine Lifetime Achievement Award for his volunteer contributions to the area of risk management and safety. James was recently named as an instructor for the prestigious Insurance Academy.

James is on the Board of Directors and Treasurer of the North Carolina Mid-State Safety Council. He has published two manuals on Workers’ Compensation and three different claims processing manuals. He has also written and has been quoted in numerous articles on reducing Workers’ Compensation costs for public and private employers. James publishes a weekly newsletter with 7,000 readers.

He currently possess press credentials and am invited to various national Workers Compensation conferences as a reporter.

James’s articles or interviews on Workers’ Compensation have appeared in the following publications or websites:

  • Risk and Insurance Management Society (RIMS)
  • Entrepreneur Magazine
  • Bloomberg Business News
  • WorkCompCentral.com
  • Claims Magazine
  • Risk & Insurance Magazine
  • Insurance Journal
  • Workers Compensation.com
  • LinkedIn, Twitter, Facebook and other social media sites
  • Various trade publications

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