California employers face tougher rules on how to classify workers

Golden state employers have tightened their classification of employees and independent contractors after a California Supreme Court ruling last year, but that may be too late to escape liability dating back years for not offering various benefits, experts say.

The 2018 state high court ruling added a stringent test on whether employers can classify workers — often working in the gig economy — as contractors rather than employees, and avoid paying minimum wage and other benefits, but another recent court decision and guidance from the state’s Division of Labor Standards Enforcement may expand the scope of the ruling to include past years. In addition, pending legislation would add workers comp obligations, experts say.

At the federal level, however, a memo from the National Labor Relations Board on Tuesday favored gig economy employers. 

On May 2, the 9th U.S. Circuit Court of Appeals held in Vazquez v. Jan-Pro Franchising Intl. that the 2018 holding by the California Supreme Court in Dynamex Ops. W. Inc. v. Superior Court — which established a new test for determining whether workers were independent contractors or employees under state law — could be retroactively applied. And the May 3 letter from the California DLSE confirmed that the Dynamex decision extends to obligations imposed by the Industrial Welfare Commission wage order, making employers who misclassify workers responsible for California Labor Code obligations such as overtime, minimum wage, reporting time pay, record-keeping, business expense reimbursement and meal and rest periods.

“(The Jan-Pro) decision puts a spotlight on proper classification and the tremendous amount of risk that an organization carries with improper classification,” said Justine Phillips, a partner in the San Diego office of Sheppard, Mullin, Richter & Hampton LLP. She said employers who misclassify employees can face “a whole wheel of terribles” including liability for failure to pay minimum wage, offer sick leave, proper withholding, lack of disability and workers compensation and more. With the look-back period established by Jan-Pro, employers could potentially face claims from workers misclassified as far back as four years ago, she said.

Ms. Phillips said audit activity by the state’s Employment Development Department has also drawn more attention to misclassification. Claims filed with the state by independent contractors seeking disability for a workplace injury or unemployment will trigger an automatic and immediate audit, and she said she believes “the EED is considering Dynamex and its progeny to determine proper classification.”

For insurers, the uncertainty surrounding independent workers in the gig economy, where workers often work for several companies, may give some pause and make the job of assessing risk more difficult, said Liz Carabas, Portland, Oregon-based managing principal at insurance brokerage and specialty risk management firm Integro Group Holdings LP.

Angela Childers

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