California Independent Contractor Statute

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Tonkon Torp LLPThe topic of independent contractors has been at the forefront of late, with both the Department of Labor and the Oregon Bureau of Labor and Industries taking a keen interest in reviewing independent contractor relationships and enforcing wage and hour laws. The reasons are at least two-fold: to ensure that individuals who are actually employees, and not independent contractors, have their rights under wage and hour laws vindicated, and to capture as much tax revenue as possible for both the federal government and the State of Oregon.

California is the latest state to take significant action in this area. This is important to Oregon employers not only to the extent they also have California employees, but because legislation in California is often a bellwether for what may happen in Oregon.

Most states have fairly complicated and flexible multi-factor tests to determine whether someone providing services to a company is an employee or independent contractor. Oregon, in fact, applies different multi-factor tests depending upon the context in which the issue arises. In April 2018, the California Supreme Court issued its decision in the Dynamex case in which it sought to simplify the inquiry. The Court held that a worker is considered an employee under the state Wage Orders unless the hiring entity demonstrates all three of the following prongs (known as the "ABC test"):

  1. 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 under which the services are procured and in fact;
  2. The worker performs work that is outside the usual course of the hiring entity's business; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

The Court's decision was limited to the application of Wage Orders in California. The state legislature stepped in and passed a statute, known as AB 5, which makes this test applicable to all situations in which the employee/independent contractor distinction is important. The bill passed the State Assembly in May 2019 and the State Senate on September 11, 2019. California Governor Gavin Newsom has promised to sign the bill into effect, making it the law in California. Once signed, the legislation will make the ABC test the law in California with extremely limited exceptions. The law will go into effect on January 1, 2020 with retroactive effect.

There are indications that Oregon and Washington legislators have been following the passage of AB 5 closely, and we may therefore see similar legislation in both states in the next legislative sessions.

While such legislation in Oregon and Washington would simplify the analysis, it would make it difficult for businesses to establish contract workers as independent contractors. Particularly problematic are the requirements that: the work be outside the hiring entity's usual course of business; and that the worker be customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. Contracting with someone to come in and paint the offices at your business should not present a problem. But the all too familiar situation where there is a crush of work or large project which requires additional help, even for ancillary tasks, will likely result in contracted workers being considered employees under the ABC test.

Misclassification of workers can lead to liability for unpaid wages, unpaid overtime, and unpaid taxes, as well as the potential for an investigation by the Department of Labor or BOLI.

We will monitor all legislative actions closely and keep you apprised if it appears similar legislation is likely to be passed in Oregon or Washington.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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