From the desk of the COO: The Future of Worker Classification

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How do we classify workers in light of California's recent decision in Dynamex?

 

In this age of rapid innovation and disruption, changes are happening faster than the regulatory machine can react. And the modern workforce—where contract work has become the new normal—is no exception. The number of workers participating in “alternative work arrangements” has grown by 5.7% between 2005 and 2015.

Though this trend has been building for the past two decades—regulators are just now catching up.

Whether you plan on being a contract worker or building a contract workforce, now is a great time to start paying attention to changes in employment law. A recent decision in the state of California, Dynamex Operations West, Inc. v. Superior Court of Los Angeles, defined who can be considered an independent contractor and who must be made an employee— and this decision out of California may define the future of work in America for decades to come.

The current IRS standard for worker classification

Before the Dynamex decision, the tests to determine how to classify a worker were defined, but left a lot of room for interpretation. This excerpt from the IRS website shows just how malleable the standard has been up to this point:

There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

Crystal clear, right? It’s no surprise that we frequently get questions about whether a job should be classified as W-2 (employee) or 1099 (independent contractor). With so little clarity around the IRS test, how do we make sure that jobs are properly classified?

We ask the following questions:

  1. Can individuals work remotely?

  2. Can they use their own equipment and software?

  3. Can they work independently with little oversight and deliver a final product for review/revision?

  4. Do workers have multiple clients for whom they provide similar services?

  5. Do they currently run and operate a consulting business or sole proprietorship?

If the answers to most or all of these questions are “yes”— the chances are good that the job should be classified as a 1099 Independent Contractor role.

The Dynamex Decision

So what does the Dynamex decision have to do with worker classification?

Dynamex Operations West, a delivery service provider on the West Coast, was classifying all of their delivery drivers as 1099 Independent Contractors. Two delivery drivers, feeling they were missing out on key benefits of employment, brought a case against Dynamex claiming they had been misclassified. This case made its way up to the California Supreme Court, and on April 30 of this year, became the catalyst for the new classification test in California.

The Dynamex Decision requires that California employers prove the following (they are calling it the ABC test) to call a worker an independent contractor rather than an employee:

  1. (A) The worker must be free from control of the hiring entity in connection with the performance of work, in contract and in fact.

  2. (B) The worker performs work that is outside the usual or core business functions of the hiring entity’s business.

  3. (C) The worker is customarily engaged in an independently established trade, occupation, or business that is of the same nature as the work being performed under the contract.

All three factors above must be present in order for a worker to be classified as a 1099 independent contractor. Some version of the he ABC test is being used in other states such as New Jersey and Massachusetts with other states using it to determine certain benefits such as unemployment compensation.  

Contractors and hiring agents alike should pay attention to all the changes in labor law over the next several months. The California Supreme Court has denied a request to give more guidance on how to apply the ABC test, and there are sure to be more developments as employers grapple with how to apply this new ruling. We’re watching carefully to ensure that our hiring firms/companies and workers are in compliance.

Download the HaE Guide to Worker Classification to see the factors the IRS considers in determining employee or contractor classification and the penalties and consequences for misclassification.