07/23/2019

Recent decision holds that 'ABC' independent contractor test applies retroactively


Updated 7/25/19

A new court ruling has temporarily halted the requirement that federal courts should apply the “ABC” test to all pending claims, regardless of when the claim originated.

The Ninth Circuit Court of Appeals has asked the California Supreme Court to determine whether its own decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles should apply retroactively as reported in the CDA article below.

California employers should consider classification decisions carefully and should seek legal counsel when the classification is not entirely clear. CDA will notify members of The California Supreme Court’s decision and how it will affect employers.


A California Supreme Court ruling in 2018 that created a stricter standard for determining who meets the definition of “employee” applies retroactively, the Ninth Circuit held in a May 2, 2019, ruling.

The decision means the “ABC” test created last year by the California Supreme Court will be applied to cases going forward, as well as to disputes dating back to before the new test was enacted. The ABC test makes it harder for employers to classify workers as independent contractors, which could be problematic for practice owners who improperly classified employees without consideration of the Borello or ABC test factors.

Background

The California Supreme Court on April 30, 2018, issued its ruling in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, announcing a significant adjustment from the S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989) test previously used by California courts and state agencies. The courts replaced the previous Borello test with the more stringent ABC test for determining whether an individual is considered an employee under the Industrial Welfare Commission wage orders, which govern aspects of wages and working conditions. (Dental practices can refer to Wage Order 4-2001.)

Borello factors and pre-Dynamex decision

The Borello test evaluated multiple factors to determine whether an individual was an independent contractor. The principal factor of the Borello test was whether the “person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.” The test also included nine additional factors, but the test did not require that all factors had to be met to establish independent contractor status:

(1) right to discharge at will, without cause; (2) whether the one performing the services is engaged in a distinct occupation or business; (3) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (4) the skill required in the particular occupation; (5) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (6) the length of time for which the services are to be performed; (7) the method of payment, whether by the time or by the job; (8) whether or not the work is part of the regular business of the principal; and (9) whether or not the parties believe they are creating a relationship of employer-employee. Borello, 48 Cal. 3d at 351.

Dynamex ABC decision – what it means for practice owners

The 2018 California Supreme Court’s Dynamex ruling asserted that the so-called ABC test — and not the Borello test — will govern whether a worker is an independent contractor under the California wage orders. The ABC test imposes a significantly higher burden on practices than the more lenient Borello test, making it more difficult to establish a worker as an independent contractor. Under the ABC test, workers will be presumed to be employees unless a company can prove all three of the ABC factors:

(A) that the worker 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; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.

Legislation aims to clarify who is an employee

Current state legislation, if enacted, would codify the Dynamex decision. Codifying Assembly Bill 5 (Gonzalez, D-San Diego) would make the Dynamex ruling the new standard that would apply fully to both non-wage and wage orders defined under the IWC. This standard differs from the current standard that only applies to wage orders.

Additionally, the bill would prompt retroactive compensation to misclassified employees for all wages typically owed to employees. The retroactive compensation would backdate from April 30, 2018 (when the ABC law took effect), or the worker’s hire date, whichever is later. Some examples of wages owed pursuant to wage orders would be overtime and minimum wage requirements. Some examples of wages owed pursuant to non-wage orders would be Social Security and payroll taxes, unemployment insurance taxes, state employment taxes and workers’ compensation insurance related to operations.

CDA has been working with the author and sponsor of AB 5 to secure an expansion of the health care provider exemption that is currently in the bill. This exemption would mean that instead of the ABC test established by the Dynamex decision, the employment relationship for dentists would be governed by the Borello test in place prior to the decision.

Recent amendments to the bill begin to address the concerns CDA has raised related to the ABC test; however, the requested exemption would be limited to only dentists and most likely take the form of the physician and surgeon exemption language currently in the bill. Assemblymember Gonzalez’s office has stated its openness to include such an exemption and CDA continues to advocate for its inclusion in future versions of the bill.

Dental practices should keep in mind that government enforcement agencies that regulate businesses’ compliance with employee classification rules tend to be highly unforgiving of misclassified staff, as they see such misclassification as an opportunity for employers to sidestep minimum wage, overtime and meal/rest break requirements. Detailed questions or concerns related to classification should be reviewed with the practice’s legal counsel.

AB 5 could have major implications for California practices. Years of misconceptions have normalized classifying the dental team with little consideration of the legal implications. The sooner practices fix this, the sooner they could lower their potential liability.

Given the stringent ABC test and employers’ responsibility relating to the burden of proof, the number of individuals who are considered employees in California will almost certainly increase. As always, CDA is advocating in the best interest of dental practices everywhere. Practices that misclassified some of their staff should contact a labor law attorney or HR company to audit back payments of wages owed and assess their next steps toward compliance as soon as possible.

HR for Health is one of the leading human resources management systems used by dental practices in California. As an endorsed partner of CDA, HR for Health has provided this article to ensure practices have a strategic plan when facing complex HR matters. Practices can learn more about becoming compliant by contacting HR for Health at 925.429.8552, option 1, or by email.

CDA will keep members informed about Assembly Bill 5 on cda.org and in the Update.



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