California is starting 2020 out with a bang, having passed a raft of new employment legislation that will have wide-ranging impact.
Employers will need to be aware of the multitude of updates to avoid falling afoul of new regulations and risking fines. The new laws govern arbitration agreements, settlement agreements, FEHA amendments, dress code policies, minimum wage, corporate diversity and lactation breaks. Of particular interest, however, are new regulations on independent contractor classifications and how they might impact insurance agents.
As of January 1st, the state has imposed a more exacting test for classifying independent contractors and distinguishing them from regular employees who work on a W2 basis. Now, companies will need to pass the “ABC Test” to prove that a contractor or consultant is not a W2 employee. Companies that misclassify employees will run the risk of incurring severe penalties.
California, and indeed most states, assume that people who are paid compensation to perform services are employees. According to the new ABC Test, the company has to show that A) the worker is free from control and direction in performance of the services; B) performs work that is outside the course of the hiring company’s business; and C) is engage in an independently established trade, occupation or business that is of the same nature as the work being performed. The law applies to both California-based companies as well as out-of-state companies doing business in California. In a recent court case, Dynamex Operations West, Inc. v. Superior Court of Los Angeles, the state’s Supreme Court rules that companies must meet all three terms of the test to prove that a contractor is not an employee who is misclassified.
The law was passed to formalize the decision from this court case and ensure that workers who have been improperly classified are able to benefit from the same rights and protections accorded to ordinary employees. These rights include minimum wage, worker’s compensation, unemployment insurance, paid sick leave and paid family leave.
A number of occupations are, however, exempt from the test and instead are regulated according to the test promulgated by the 1989 case S.G. Borello & Sons, Inc. v. Departmetn of Industrial Relations. The standard according to this case hinges on whether the employing company has enough control over the manner and means in which work is carried out to create an employment relationship. Standards include: 1) the level of supervision by the employing company, 2) whether the worker holds him/herself out as engaged in a business distinct from the employer, 3) whether the services are an integral part of the company’s business, 4) whether the worker supplies his own tools, personnel or other resources, 5) whether a special skill is involved, 6) the duration of the relationship, and 7) the method of payment.
Professional positions exempt from the ABC standard include licensed heath care professionals, registered securities broker-dealers, investment advisers, insurance agents, direct-sales salespeople, real estate license holders, lawyers, accountants, architects and engineers, among others. The Borello test (as opposed to the ABC test) also applies to business-to-business contracting relationships.
Companies that misclassify workers under either the ABC or Borello tests can face a number of adverse consequences. They could face both private and class action suits from misclassified employees, with the state empowered to seek injunctive relief for the improperly classified employees. These employees can bring claims against employing companies for violations of wage and hour laws, paid sick leave, paid family leaves, and other laws and regulations governing benefits. Companies can be liable for unpaid wages, overtime, expenses and various other types of compensation. In addition, there are also civil penalties of $15-25k for each violation.
Fortunately, insurance agents and brokers are exempt from the regulation. For more information, please read:
California Employment Law Update 2020: New Year Brings Surge of New Laws and Legal Battles Impacting Employers Doing Business in California | JDSupra