Recently enacted California Assembly Bill 5 (“AB-5”) is a game changer for businesses that use independent contractors in California — and a warning shot for employers nationwide.  Subject to exemptions for certain occupations and professions, AB-5 imposes a strict “ABC” test that appears to put a thumb on the scale of classifying workers as employees rather than independent contractors.

The ABC test was adopted last year by the California Supreme Court in its Dynamex decision to determine classification of workers for purposes of the state’s Industrial Welfare Commission Wage Orders.  For 20 years before Dynamex, worker classification was governed by the more relaxed “Borello” multi-factor test, which focuses on the hirer’s right to control an individual’s work and other secondary factors.  AB-5 now makes the ABC test the default standard for determining worker classification — not just under the Wage Orders, but also for all California Labor Code, unemployment insurance, and workers’ compensation claims.

As a result of the passage of AB-5, companies that hire consultants or contractors based in California should take a hard look at those relationships and determine whether they need to reclassify any such individuals as employees.  For other companies, this legislation should be monitored as the potential tip of an iceberg of a trend in many states, and potentially nationwide, toward imposing additional hurdles in classifying workers as independent contractors.


Continue Reading Hiring Employees vs. Independent Contractors: Navigating Classification Issues in a Drastically Altered California Legislative Landscape

On April 29, 2019, the U.S. Department of Labor’s (DOL) Wage and Hour Division issued an opinion letter finding that “virtual marketplace company” workers (of an unnamed business) were independent contractors rather than employees.  While not binding, the opinion signals that DOL is taking a less aggressive approach than in recent years to the hot-button issue of worker classification in the online “gig economy.”  Companies with similar business models that link workers with consumers through technology platforms or “virtual marketplaces” — such as for transportation, delivery, moving, cleaning and household services — may be able to rely on the new opinion to establish a good-faith defense under the Fair Labor Standards Act (FLSA) of their classification of workers as independent contractors.

Continue Reading DOL Labels Gig Economy Company’s Workers as Independent Contractors

California’s highest court recently pronounced a new worker classification standard in Dynamex v. Lee, a case involving wage and hour requirements under the California Labor Code. Compared with the old rule, the new standard is simpler, arguably more predictable—and will make it more difficult for businesses to classify workers as independent contractors. Dynamex will have immediate consequences for businesses operating in California. Indeed, within days of the ruling, workers sued two prominent “gig economy” companies alleging unlawful worker classifications.  For companies in every state, the decision is a reminder that the potential risks of worker misclassification could arise under myriad state and federal laws.

Continue Reading What Companies Should Know in the Wake of California’s New Worker Classification Ruling

The U.S. Department of Labor (DOL) recently announced that it will apply a new, more flexible test for determining whether interns working for “for-profit” companies are entitled to minimum wage and overtime protection under the federal Fair Labor Standards Act (FLSA). The new test is set forth in DOL Fact Sheet #71 (updated January 2018).

The FLSA requires employers to pay “employees” minimum wage and overtime. It has long been recognized, however, that certain categories of workers are not “employees” for purposes of the FLSA. This includes unpaid interns. Prior to this announcement, the DOL applied a strict test that required private employers to establish six different factors to demonstrate that workers were appropriately classified as unpaid interns. In the past few years, as litigation over the use of unpaid interns increased, that test had been rejected by courts, including the United States Courts of Appeals for the Second and Ninth Circuits. Decisions issued by those courts favored a more flexible test that holistically examines the relationship between an intern and employer to determine who is the “primary beneficiary” of the relationship.

The announcement by DOL is intended to align its enforcement policies with this more recent case law and provide DOL investigators with greater flexibility in analyzing issues involving unpaid interns on a case-by-case basis.


Continue Reading Labor Department Scraps Unpaid Intern Test and Adopts More Flexible Approach

Earlier this year we described the IRS’s Voluntary Classification Settlement Program (VCSP), which substantially reduces an employer’s liability for back taxes when the employer voluntarily reclassifies employees who have been treated as independent contractors.  Through June 30, the relief program is available even if the employer did not file Forms 1099 reporting the compensation paid to the workers.  Starting in July, however, an employer will be eligible for the program only if the employer filed all required Forms 1099 for the previous three years with respect to the workers it wishes to reclassify.

What does worker classification have to do with health reform?  Quite a lot, as it turns out.  Starting in 2014, employers with more than 50 full-time employees will owe a “shared responsibility” excise tax if they fail to offer group health coverage on every day of the month to at least 95% of their full-time employees and the employees’ dependent children.  A “full-time employee” is a common-law employee who works an average of at least 30 hours per week.  (You will find a more detailed description of the shared responsibility rules here and here.)
Continue Reading Misclassified Workers Create Penalty Risks Under Health Reform

Misclassification of workers remains a hot button issue.  The IRS continues to scrutinize employers’ worker classification practices, and it is likely that health reform will cause the Department of Labor to review classification issues even more closely than it has in the past.  

In an effort to encourage employers to reclassify independent contractors as employees, the IRS created the Voluntary Classification Settlement Program in 2011.  The program limits the tax liabilities of employers who voluntarily reclassify independent contractors.  Recently, the IRS expanded the program to cover a wider range of situations and provided additional clarifications.
Continue Reading Worker (Mis)Classification: IRS Expands Voluntary Settlement Program