“Qualifying and Paying Independent Contractors and Temp Employees”

CSMFO webinar

9:00-10:30 a.m., Wednesday, December 19, 2018

Are you up to speed on handling independent contractors and temporary employees? Recent court decisions and standards from CalPERS and others pose challenges. Reviewing and managing such contracts often become Finance’s responsibilities. Advance registration required for this no-charge webinar: https://attendee.gotowebinar.com/register/6657188158381808386 Webinar topics: 1. What are the tests to determine independent contractor status? 2. How have recent courts decisions affected this determination? 3. What do you need to know about standards that CalPERS and others use? 4. What are ways to mitigate risks to your agency? Presenter: * Daphne Anneet, Partner, Burke, Williams & Sorensen Color Commentator: * Debra Gill, Director, Human Resources and Labor Relations, Pleasanton, CA Audience: finance professionals who review and/or pay independent contractors or temporary employees Get connected with these steps. 1. Register in advance for the webinar: There is no charge for participating in the webinars, but each requires advance registration. *** Advance registration required for this no-charge webinar: https://attendee.gotowebinar.com/register/6657188158381808386 Be sure to "white list" or "allow" emails from customercare@gotowebinar.com to receive notices for this webinar. 2. Connect with the webinar and audio: Use your logon information from the email confirmation you receive via email from GoToWebinar. We recommend the telephone option dial-in number provided by GoToWebinar for sound quality. Depending upon your internet connection, VOIP option for audio (computer speakers) can have delays or sound quality issues.

3. Ask questions: You may submit questions anonymously via email to CSMFO@DonMaruska.com in advance or via the webinar during the panel discussion. As moderator for the session, Don Maruska will pose the questions. 4. Presenters’ presentation materials: We post these with the agenda at “Agendas & Archives” tab of www.csmfo.org/training/webinars. The PPT will be available 24 hours before the webinar. After a webinar occurs, a digital recording along with the PowerPoint materials and results of the polling questions will be available after 24 hours at the "Agendas & Archives" tab of www.csmfo.org/training/webinars. CPE Credits: If you are a member of CSMFO and wish to obtain CPE credit, you need to register and attend in your name, respond to at least 75% of the live polling questions, and pay $25 to CSMFO after notice from CSMFO following the webinar. After payment, CSMFO emails the CPE certificate as a PDF. Post-Webinar Group Discussions Many agencies are organizing groups to participate in the webinars (live or recorded) and discuss the topics among themselves after the webinars. Some are summarizing their discussions and distributing them to managers throughout their organizations. Use the CSMFO Coaching Program as an effective way to enhance professional development in your agency. Here are some discussion starters for this session: a. What types of independent contractors and temporary employees do we have? b. Are there improvements that we need to make in how we qualify and pay them? c. How can we mitigate risks to our agency? MORE RESOURCES--See the "Coaching Corner" at www.csmfo.org/coaching for valuable resources to boost your career. These include a Financial Management Skills Inventory, Resource Matrix, Coaches Gallery of 24 volunteer CSMFO Coaches willing to help you on a one-to-one basis, and an archive of digital recordings and materials from past webinars at www.csmfo.org/training/webinars. Enjoy the resources to help you succeed in local government finance. Don Maruska, MBA, JD, Master Certified Coach Director, CSMFO Coaching Program; CSMFO@donmaruska.com Author “How Great Decisions Get Made” and “Take Charge of Your Talent” www.TakeChargeofYourTalent.com

Daphne Anneet, Partner, Burke, Williams & Sorensen Daphne Anneet is a partner in Burke, Williams & Sorensen’s Los Angeles office. She is Vice-Chair of the firm’s Labor and Employment Practice Group. A skilled litigator, Daphne has achieved excellent results for clients in state and federal court, as well as in arbitrations and administrative proceedings. She represents public and private employers in a wide range of matters including class actions, wrongful termination, discrimination and harassment litigation, wage and hour litigation, pension litigation, contracting out disputes, unfair labor practice disputes, disciplinary appeals, and appellate matters. Daphne has served as lead defense counsel in a number of class action lawsuits over the past decade and has a proven track record of achieving successful results in a variety of creative and cost-effective ways. A graduate of the LA County Bar Association’s Trial Advocacy Project, Daphne has served as a pro bono prosecutor. In addition to her litigation practice, Daphne has served as the Chief labor negotiator for the cities of Alhambra, Corona, Lynwood, Hermosa Beach, and Hemet. She currently provides labor relations services a number of cities, counties and special districts. Since the enactment of AB 646, Daphne has served as an agency advocate for several factfinding proceedings. Daphne serves as General Counsel to the City of Coronado’s Civil Service Commission. As a member of the panel for NAM (National Arbitration and Mediation), Daphne has also served as an arbitrator. Daphne conducts independent investigations of complaints involving discrimination, harassment, retaliation, workplace misconduct, and alleged conflicts of interest. She has also written and lectured on a wide array of employment issues for many organizations at their annual training conferences and conventions, including the Los Angeles County Bar Association (LACBA); Professionals in Human Resources Association (PIHRA); California Public Employers Labor Relations Association (CALPELRA); League of California Cities; Association of California Water Agencies; Southwestern Law School; and, Southern California Public Labor Relations Council. Daphne received her Juris Doctor, magna cum laude, from Southwestern Law School, where she was awarded the Outstanding Woman Legal Graduate award. She also served on Southwestern’s Board of Trustees.

Daphne is a committee member of the Labor and Employment Law Section of the LA County Bar Association and an affiliate member of CALPELRA. She is a Past President of the National Association of Women Business Owners, LA Chapter.

Debra Gill, Director, Human Resources, Pleasanton, CA Over twenty years of H.R. experience including management of all human resources functions in a full service local government agency. Management responsibilities include labor relations, organizational development, succession planning, employee engagement, performance management, budget, classification and compensation, recruitment and retention, safety, benefits and workers’ compensation. Over fifteen years of bargaining experience and currently serve as Chief Negotiator for the City. Debra earned her Bachelor’s degree from California State University – East Bay in Liberal Arts and Sciences/Liberal Studies and Business Administration. She is President of the Employee Relations Department for the League of California Cities and a Board Member of CALPERLA.

Qualifying and Paying Independent Contractors and

Temp Employees

Coaching Program December 19, 2018

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Coaching Program: 20th year as member benefit

Career Development Committee

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Overview of Session Topics: 1. What are the tests to determine independent contractor status? 2. How have recent courts decisions affected this determination? 3. What do you need to know about standards that CalPERS and others use? 4. What are ways to mitigate risks to your agency? Presenter:

Daphne Anneet, Partner, Burke, Williams & Sorensen CSMFO Color Commentator:

Debra Gill, Director, Human Resources and Labor Relations, Pleasanton, CA Producer and Moderator: * Don Maruska, Master Certified Coach, Director, CSMFO Coaching Program

Polling Question #1:

How many persons are participating at your location?

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P r e s e n t e d b y : D a p h n e M . A n n e e t

Qualifying and Paying Independent Contractors and Temp Employees

• Classification: why it matters

• The Dynamex Decision

• Tests

• Impact of Dynamex

• How to mitigate risks

OVERVIEW

CLASSIFICATION: WHY IT MATTERS

• Employee status and related rights and benefits

M i s c l a s s i f i c a t i o n C l a i m s

U n f a i r P r a c t i c e C h a r g e s

• Unlawful transfer of bargaining unit work

• Unlawful contracting out of bargaining unit work

PENALTIES FOR MISCLASSIFICATION

IRS penalties PERS penalties Labor Code

penalties

Civil Claims

Polling Question #2:

What role(s) do you play in qualifying and paying independent contractors and temp employees?

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THE DYNAMEX DECISION

Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal. 5th 903

DYNAMEX

Facts

• Dynamex: package and document

delivery company

• Reclassified drivers to save costs

• Dynamex argued Borello should apply

• Plaintiffs argued “suffer or permit to

work” standard should apply

TESTS TO DETERMINE

INDEPENDENT CONTRACTOR

STATUS

• Common law control (Borello)

• Suffer or Permit (Martinez)

• New Test: ABC test (Dynamex)

COMMON LAW - CONTROL

• Right to direct and control the manner

and means by which the worker performs

the services

• No one factor is determinative

• Control labels are not determinative

COMMON LAW - CONTROL

• Distinct occupation

• Requires expertise/ no supervision

• Skill level

• Who supplies tools and place of work

• Duration

• Method of Payment

• Work part of regular business of principal

• Intent of the parties

NEW TEST: DYNAMEX ABC Test

A: Free from

control

C: Independent

trade, occupation

or business

B: Outside the usual

course of business

Burden is on the employer to show:

NEW TEST: ABC TEST

• A: the worker is free from the control and direction

of the hirer in connection with the performance of

the work, both under the contract for the

performance of the work and in fact; and

• B: the worker performs work that is outside the

usual course of the hiring entity’s business; and

• C: The worker is customarily engaged in an

independently established trade, occupation, or

business of the same nature as that involved in the

work performed.

Polling Question #3:

Which of the elements of the ABC Test are challenging for your agency?

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FREE FROM CONTROL AND DIRECTION

Similar to Borello test

Focuses on hiring entity’s right to control

Part A

Part B

Whether the worker performs a function that is directly tied to the heart of the operation. Examples:

Bakery hiring cake decorators > part of usual course of business Retail company hiring plumber > not part of usual course of business

Part C

Focuses on the trade, occupation, or business of the worker Whether the worker’s business exists independently

e.g. own office, advertisements, business cards

RECENT DECISIONS LIMITING THE SCOPE OF THE ABC TEST

• Garcia v. Border Transportation Group:

Wage Orders

• Curry v. Equilon Enterprises: Joint

Employment

GARCIA V. BORDER TRANSPORTATION GRP., LLC (2018) 28 Cal. App. 5th 558, as modified on denial of reh’g (Nov. 13, 2018)

• ABC test does not apply beyond the

wage order context

• “There is no reason to apply the ABC test

categorically to every working

relationship, particularly

when Borello appears to remain the

standard for worker's compensation.”

CURRY V. EQUILON ENTERPRISES, LLC (2018) 23 Cal. App. 5th 289

• ABC test does not apply in the joint

employment context

• taxes are being paid and worker has

employment protections

CONSTRUCTION PROJECT INSPECTORS

H Y P O T H E T I C A L

• Independent Contractor • Common Law Employment Relationship • Joint Employment • ABC Test

PROJECT MANAGER

H Y P O T H E T I C A L

• Independent Contractor • Common Law Employment Relationship • Joint Employment • ABC Test

UNRESOLVED ISSUES

• Retroactive application

• How CA wage orders apply to public

agencies

WAGE ORDER 4

WAGE ORDER 4

CALPERS STANDARDS AND ELIGIBILITY RULES

COMPULSORY MEMBERSHIP

• An employee of a contracting agency

becomes a CalPERS member upon hire,

unless expressly excluded by statute or

contract

• Must enroll within 90 days of

employment

INITIAL STATUS DETERMINATION

• Independent Contractor Determination

• Employment Status Determination

• Contract Exclusion ?

• my | CalPERS

• Notice of Exclusion (PERS-AEDS-139)

CALPERS Standards

• Employee: “any person in the employ of

any contracting agency”

• Common law test applies.

• Metro. Water Dist. v. Superior Court

(2004) 32 Cal. 4th 491, 499 (Cargill)

• Reminder: right to direct and control

the manner and means

Independent Contractor Exclusion Gov.t Code §20300(b)

RETIREES

Working After Retirement Options

• Independent contractor

• Employee of a third party staffing firm or

consulting firm

• Retired Annuitant on a limited term

employment contract

• Reinstatement as full-time employee

Polling Question #4:

Which of these situations for working after retirement are of most concern to your agency?

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RESTRICTIONS ON WORKING AFTER RETIREMENT

Applicable CalPERS Rules

• Gov.t Code § 7522.56 (PEPRA)

• Gov.t Code § 20221(h)

• Gov.t Code § 21224

CalPERS Guidelines

• CalPERS Circular Letter 200-002-14

• Employment After Retirement, Pub. 33,

April 2015

WHO IS COVERED BY CALPERS’ RESTRICTIONS

• A CalPERS retiree who is a common law

employee

• Not a retiree from another retirement

system (e.g. 37 Act, LACERA, OCERS)

• Not a retiree from the private sector

• Not a retiree who qualifies as an

independent contractor

RETIREES WORKING AS IND. CONTRACTORS

Will not qualify as an IC if: • Services are the same or similar to work

retiree performed or to work other active employees perform

• Position is established by statute (police chief, fire chief, mayor)

• Subject to direction and control over manner & means

• Contracting through third party does not solve problem if retiree is a common law employee

• Seek approval in advance

RETIREES WORKING AS RETIRED ANNUITANTS

Timing Threshold | Gov. Code § 21220.5 • Bona Fide separation • Where retiree has not met normal

retirement age • 60 days separation • No predetermined terms of

separation prior to retirement

RETIREES WORKING AS RETIRED ANNUITANTS

Timing Threshold | Gov. Code § 7522.56(f) • 180-day waiting period • Exceptions

• Employer certifies appointment to fill critically needed position

• Approved by governing body in public meeting

• Public safety exception • Unavailable if retiree received a

retirement incentive

RETIRED ANNUITANT APPOINTMENT

Work of Limited Duration | Gov. Code § 21224 • Limited duration • Appointment is not for an indefinite

period of time or a part time regular staff position

• Extra help work • Elimination of backlog • Special project • Peak workload demand • Prevent stoppage of business

RETIRED ANNUITANT APPOINTMENT

Interim Appointment To Vacant Position Gov. Code § 21221(h) • Interim appointment • Fill a vacant position on interim basis

• Must be made by governing body • Open recruitment pending • Limited Duration • Only one appointment • Must specify start and end date

LIMITATION ON HOURS WORKED

hours in a fiscal year

960 NO EXCEPTIONS

Count all hours worked for all

CalPERS employers

Retiree may not “volunteer” hours to extend the 960 hour limitation

RESTRICTION ON LENGTH OF APPOINTMENT

• Limited duration appointment • Cannot be indefinite - must have an

end date • Interim vacant position

• Appointment is limited to the single position pending recruitment

• Can exceed a fiscal year if recruitment underway with end defined [cannot exceed the 960 hours in a fiscal year]

RESTRICTION ON SALARY

Rate of Pay | Gov.t Code §7522.56(d) • Comparable compensation

• Compensation cannot be less than the minimum nor exceed the maximum monthly base salary paid to other employees performing comparable duties, divided by 173.333 to equal an hourly rate.

RESTRICTION ON BENEFITS

• Retirees may not receive any other benefit, incentive or compensation in lieu of benefits, or any other form of compensation in addition to the hourly rate of pay

ADDITIONAL REQUIREMENTS

• Unemployment insurance certification • Retiree must certify in writing that no

receipt of unemployment insurance payments within 12 months prior to the appointment date

• Enrollment in CalPERS system • my|CalPERS

RETIRED ANNUITANTS–IMPACTS

• Member reinstated from retirement • Retroactive payment of member and

employer contributions, plus interest • Reimbursement of entire retirement

allowance • Admin. fee of $500

PREVENTATIVE MEASURES

HOW TO MITIGATE RISK

MITIGATING RISK DEFINE THE NATURE OF THE WORK UP FRONT

• Identify specific expertise

• Describe how work is project oriented

• Time limited

• Specify that IC responsible for manner

and means of performing the work

• Actual performance must match

contract terms

• When in doubt – CalPERS review

EMPLOYEE V. INDEPENDENT CONTRACTOR Independent Contractor Assessment

Conduct and document assessment at the outset

Complete a checklist

Train contract managers to

perform the initial assessment

Require consultant and contract

manager to sign the form

Perform routine audits

Sign Audit Train List

Complete a checklist

Train contract managers to perform the

initial assessment

Require consultant

and contract manager to

sign the form

Perform routine audits

Polling Question #5:

Where would your agency benefit from more attention in assessing independent contractor status?

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Independent contractor

Third-party contract worker

Retiree Part-time employees

CALPERS MEMBERSHIP DETERMINATIONS Perform eligibility determination for each worker before hire

TEMPORARY/PART-TIME EMPLOYEES PREVENTATIVE MEASURES

Enroll all temporary/ part-time employees who are

already CalPERS members

Enroll employees who meet CalPERS

eligibility by working 1,000 hours or more in

a fiscal year

P r e s e n t e d b y : D a p h n e M . A n n e e t B u r k e , W i l l i a m s & S o r e n s e n L L P d a n n e e t @ b w s l a w . c o m

THANK YOU!

DAPHNE ANNEET

Daphne Anneet is an equity partner of Burke, Williams & Sorensen, LLP and is Vice-Chair of the firm’s Labor and Employment Practice Group. Daphne is a litigator, negotiator, trainer and investigator. She represents public and private employers in a wide range of labor and employment matters. Daphne has achieved excellent results for clients in state and federal court, as well as in arbitrations and administrative proceedings.

Los Angeles

danneet@bwslaw.com

Post-Webinar Discussion Questions

a. What types of independent contractors and temporary employees do we have?

b. Are there improvements that we need to make in how we qualify and pay them?

c. How can we mitigate risks to our agency?

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Contacts for today’s webinar

Presenter: Daphne Anneet, Partner, Burke, Williams & Sorensen DAnneet@bwslaw.com

CSMFO Color Commentator:

Debra Gill, Director, Human Resources and Labor Relations, Pleasanton, CA dgill@cityofpleasantonca.gov

Producer and Moderator: * Don Maruska, Master Certified Coach, Director, CSMFO Coaching Program CSMFO@donmaruska.com

Polling Question #6

How was the webinar of value for you and your agency?

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Resources and Feedback A digital audio recording of the session and an Agenda packet with PDF of the PPT with polling results and other materials will become available in ~ 24 hours at the “Agendas & Archives” tab of www.csmfo.org/training/webinars Other coaching resources, including volunteer one-to-one coaches are available at www.csmfo.org/training/coaching Please complete the follow up survey, including suggested topics for future webinars.

By Daphne M. Anneet | danneet@bwslaw.com UNDERSTANDING DYNAMEX: THE PUBLIC EMPLOYER PERSPECTIVE

I. INTRODUCTION

In Dynamex Operations West, Inc. v. Superior Court,1 the California Supreme Court established a new test for determining whether a worker should be classified as an employee or independent contractor under California’s wage orders. The wage orders regulate issues such as minimum wage, overtime compensation, and meal and rest periods. The Court rejected the flexible, multifactor Borello common law test that has been used to resolve worker classification issues in contexts such as pension, workers compensation, unemployment insurance and other employment rights for decades.2 Instead, the Court adopted a strict three-prong ABC test that places the burden on the employer to establish a worker is properly classified as an independent contractor and not entitled to the protections of the wage orders. Notably, under the ABC test, a worker who performs services that are part of the employer’s “usual course of business” is protected under the wage orders as an employee.

Dynamex is part of a growing trend of case law and statutory regulations to address perceived

1 Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903 (Dynamex). 2 S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (Borello), see also, infra, fn 21.

worker misclassification abuses. In response, California public employers should review their current contractual relationships under the ABC test and also seize the opportunity to review all contractual relationships to ensure compliance with other key regulations, including CalPERS membership requirements.

II. THE DYNAMEX CASE

Dynamex is a nationwide package and document delivery company. After Dynamex restructured its operations and reclassified all of its drivers as independent contractors to generate cost savings, two of its drivers filed a class action. They alleged that the company misclassified its drivers as independent contractors instead of employees, under the wage order governing the transportation industry and the California Labor Code.3

California wage orders protect employees, not independent contractors. To address plaintiffs’ claims, the Court had to determine the applicable standard and test for evaluating their status as employees or independent contractors. Dynamex argued for the application of the Borello common law standard. That test is a flexible, multifactor approach that focuses primarily on whether the hiring entity has a “right to control” the manner and means by which the worker

3 Industrial Welfare Commission Wage Order 9, Cal. Code Regs., Tit. 8, § 11090, et. seq.

performs the contracted service.4 The Borello test has been used to make independent contractor determinations in a wide variety of contexts for over thirty years.5 The plaintiffs argued that in addition to using the Borello test, the Court should apply two additional tests, including the standard known as “to suffer or permit to work.” That standard is much broader and is intended to protect relationships beyond the reach of the common law.6

The Dynamex court adopted the “suffer or permit” standard.7 Under that standard, if an employer requires or allows employees to work, they are employed and the time spent is probably hours worked. The Court adopted this standard to provide workers with the broadest possible protections so that “workers are provided at least the minimal wages and working conditions that are necessary to enable them to obtain a subsistence standard of living and to protect the workers' health and welfare.”8 The Court also sought to remove employers’ economic incentives to misclassify workers to avoid costs associated with paying payroll taxes, etc. for employees.9 III. THE ABC TEST

After adopting the “suffer or permit to work” standard, the Court next had to establish a workable test to govern the determination.10 The Court adopted the ABC test as enacted by the state of Massachusetts, after concluding it is the most structured, provides the broadest 4 To assist in the determination, the test also sets out a series of “secondary factors” to consider which include: whether the worker is engaged in a distinct occupation or business; whether the work is usually done under supervision; the skill required in the particular occupation; who supplies the instrumentalities, tools and location of work; the duration of the services; the method of payment; whether or not the work is part of the regular business of the hiring entity; and, the intent of the parties. Id. at 351. 5 Messenger Courier Assoc. v. California Unempl. Ins. Appeals Bd. (2009) 175 Cal.App.4th 1074, 1092 (unemployment insurance benefits); Tieberg v. Unemployment Ins. App. Bd. (1970) 2 Cal.3d 943, 512 (unemployment insurance); McFarland v. Voorheis-Trindle (1959) 52 Cal.2d 698 (workers’ compensation); Metropolitan Water Dist. v. Superior Court (Cargill) (2004) 32 Cal.4th 491 (CalPERS benefits). 6 Martinez v. Combs (2010) 49 Cal.4th 3, 69 7 Id. at pp. 916, 943 (emphasis added). 8 Id. at p. 952. 9 Id. at p. 952. 10 Id. at p. 946.

coverage, and removes the possibility for manipulation to which the more flexible tests such as the Borello common law are susceptible.11

Under the ABC test, the hiring entity - not the worker - must establish that a worker is an independent contractor under the wage order. To properly classify the worker as an independent contractor, the hiring entity must prove each of the following three conditions:

(a) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and,

(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 that involved in the work performed.12

Applying the ABC Test

Part A “free from the control and direction”

Part A requires the hiring entity to establish that the worker is free from the direction and control of the hirer in performance of the work, both under contract and in fact. This requirement appears to closely mirror the Borello test, with the focus on whether the hiring entity retained or exercised the “right to control” the manner and means by which the workers perform the services.

Part B “work that is outside the usual course of…business”

Part B has raised the most concerns for employers. Courts must consider the usual course of business for which the worker has 11 Id. at pp. 954-955, 957, fn. 23. 12 Id. at pp. 956, 964.

been retained and assess the worker’s role in the overall operation. If the worker performs a function that is directly tied to the heart of the operation, the service will be deemed to constitute a regular and integrated portion of the employer’s business. This factor would thus weigh in favor of a finding of employee status.

To explain this prong of the test under the ABC test, the Court provided examples of fairly straightforward transactions. For example, the Court explained that when a retail store hires a plumber to a repair a leak, the services are not within the retail store’s usual operation. Conversely, when a bakery hires cake decorators to work on custom designed cakes on a regular basis the workers are part of the bakery’s usual operations.13

The use of independent contractors to perform any service that is part of the public agency’s usual course of business carries a high degree of risk of misclassification. To pass muster under this general guidance, a public agency must clearly establish the contract for service is one that is unrelated to the agency’s usual course of business. The agency can do so by identifying the specialized nature of the service, its purpose and anticipated duration. If the service is ongoing and relates to a core function, a literal application of the ABC test may result in the classification of the worker as an employee. To avoid a misclassification determination, the agency will need to establish its independent authority to contract for the service and challenge any interpretation of the prong that is inconsistent with such authority.14 Alternatively, the agency

13 Id. at pp. 959-960. 14 Unlike private businesses, public agencies have the express authority to contract for specialized services, regardless of whether they relate to a core function. Gov. Code § 53060 provides, “[t]he legislative body of any public or municipal corporation or district may contract with and employ any persons for the furnishing to the corporation or district special services and advice in financial, economic, accounting, engineering, legal, or administrative matters if such persons are specially trained, experienced and competent to perform the special services required.” See also Gov. Code § 37103. Public agencies should aggressively argue for an interpretation of Prong B that does not conflict with their express authority to contract for special services and advice.

may consider contracting for the service through a third party contract.15

Part C “independently established trade, occupation, or business”

This inquiry focuses on the usual or customary trade, occupation, profession, or business of the person retained to perform services for the employer. The employer must show that the worker is engaged in an enterprise that exists and can continue to exist upon termination of the relationship. In other words, the worker must be well-established in a business for his or herself, as evidenced by incorporation, licensure, advertisements, own office, business card, and offers to provide services to many potential customers.

IV. THE POTENTIAL IMPACT OF DYNAMEX ON CALIFORNIA’S PUBLIC AGENCIES

The Dynamex decision leaves some important questions unanswered.

Does the ABC Test Apply to Joint Employment Relationships?

The Dynamex Court did not address whether the ABC test applies in the context of a joint employment relationship. Such relationships are common in the public sector. They arise when an employer uses staffing agencies, management companies and consulting firms to supply workers to perform specific services. The worker is subject to the control of both the outside firm and the public agency: the outside firm is responsible for all of the administrative functions, including payment of salary, benefits and payroll taxes, and both entities are responsible for ensuring the worker receives proper employment protections.16 In a positive development, in Curry v. Equilon Enterprises, an appellate court recently found that the ABC test does not apply in the joint employment context because “taxes are being paid and the worker has employment protections.”17

15 See infra, fn. 18. 16 In-Home Supportive Services v. Workers’ Compensation Appeals Board (1984) 152 Cal.App.3d 720, 732. See also Cargill, supra, 32 Cal.4th at p. 506. 17 Curry v. Equilon Enterprises, LLC (2018) 23 Cal.App.5th 289, 313-314 (Curry).

Following Curry, public agencies may be able to contract out functions that are part of their core business, without running afoul of the ABC test, so long as they do so with a third party entity that serves as the primary employer, rather than contracting directly with the individuals.18 Such contractual arrangements ensure the worker receives the protections of California’s labor and employment laws and that the appropriate payroll taxes are paid. By clearly articulating the primary employer’s responsibilities towards the workers in the contracts, employers may be able to reduce the risk of misclassification under the “usual course of business” prong of the ABC test.

Will the ABC Test Apply Beyond the Wage Order Context?

The ABC test appears to be limited to the wage order context. The Dynamex court expressly limited its application of the ABC test to the analysis of the “suffer or permit to work test” under the wage orders.19 The decision does not change the definition of independent contractor under federal law, which governs who is an employee for purposes of Social Security and payroll taxes. Indeed, the Dynamex court specifically recognized that a worker may qualify as an employee under one statute but not another.20 Thus, Dynamex contemplates that workers who qualify as independent contractors under the Borello common law test under a scheme such as Unemployment Insurance, Workers’ Compensation, or CalPERS regulations, may not be considered independent contractors for the purposes of wage order violations.21

18 Note, however, that employees of third parties must be enrolled in CalPERS if they qualify as the City’s employees under the common law control test. Cargill, supra. 19 Dynamex, supra, 3 Cal.5th at p. 916 20 Dynamex, supra, 4 Cal.5th at p. 948. 21 The Court has recognized that control over how services are performed, the primary factor in the common law control test, remains “an important, perhaps even the principal, test for the existence of a common law relationship.” Martinez, supra, 49 Cal. 4th at p. 50, fn 16, p. 76. (See, e.g., Metropolitan Water Dist. v. Superior Court, supra, 32 Cal. 4th 491, 512][pension law]; Tieberg v. Unemployment Ins. App. Bd. (1970) 2 Cal. 3d 943, 946 [unemployment insurance]; and, McFarland v. Voorheis–Trindle Co. (1959) 52 Cal. 2d 698, 704 [workers' compensation].)

Following Dynamex, in Garcia v. Border Transportation Group LLC, a California Appellate Court declined to apply the new ABC test beyond the Wage Order context. 28 Cal. App. 5th 558, 571 (Ct. App. 2018), as modified on denial of reh'g (Nov. 13, 2018). The court applied the new ABC Test to the Plaintiff’s Wage Order claims, but not to his other claims. (Id.) (“There is no reason to apply the ABC test categorically to every working relationship, particularly when Borello appears to remain the standard for worker's compensation. […] In the absence of an argument that the statutory purposes underlying those [non-wage-order] claims compel application of a different standard, we conclude Borello furnishes the proper standard as to Garcia’s non-wage-order claims.”)

While it appears the Dynamex decision does not change the definition of employee outside of the wage and hour context, it is uncertain as to how lower courts and administrative agencies interpret Dynamex and its application in other contexts. Final resolution may need to come from the legislature, not the courts.

Does Dynamex Have Retroactive Application?

The Dynamex court did not address the issue of whether the decision applies retroactively. Employers maintain that the ABC test is a new mandatory test that should not be applied retroactively as it would violate due process. Courts and administrative agencies have followed the Borello multifactor test for more than three decades and businesses and public agencies have relied on the Borello common law standard in structuring their business and service models. On the other hand, employee advocates assert that the decision merely clarified existing law and therefore should apply retroactively.

On June 20, 2018, the California Supreme Court unanimously denied a petition for rehearing solely on the issue of whether the Court’s adoption of the ABC test should apply retroactively. One trial court presented with the issue of retroactivity has already ruled in favor of the employee.22 Also on June 20, 2018, 22 Johnson vs. VCG-IS, LLC, et al. Case No. 30-2015-00802813-UC-CR-CXC (July 18, 2018).

the California Chamber of Commerce, and multiple business organizations petitioned to have the Administration and Legislature “postpone or suspend the application of the Dynamex decision until all parties impacted by the decision can work together to develop a balanced test for determining independent contractor versus employee status that reflects the needs of California’s economy and the workforce.”23 It is notable that every other state that has adopted the ABC test has done so through legislative action, not a judicial decision. Given the current California legislature’s pro-employee posture, it is unclear as to whether legislative action would favor employers.

How Do California Wage Orders Apply to California Public Agencies?

While the Dynamex decision has been perceived as a direct blow to the “gig economy” and a direct attack on new business models that are based on independent contractor relationship that have driven the growth of companies such as Uber, Lyft, and Grub-Hub, the direct impact on California public agencies may be more limited. That is because not all of the wage order provisions apply to public agencies.24 For example, the Wage Order that is most applicable for public sector employees is Wage Order 4.25 It addresses wages, hours and working conditions in “Professional Technical, Clerical, Mechanical and Similar Occupations.” Wage Order 4 specifies that the following provisions do not apply to public agencies: daily overtime and double pay; meal and rest periods; reporting time pay; and, uniforms and equipment among others. Daily overtime, meal and rest breaks and failure to comply with reporting provisions are among the most common claims in wage and hour litigation.26

23 See, https://advocacy.calchamber.com/2018/07/30/coalition-builds-support-for-independent-workers/. 24 See, e.g., Clear As Mud: California Wage and Hour Laws in the Public Sector, The Authority, CalJPIA, Issue 50, April 2016. 25 8 Cal. Code Regs. § 11040(1)(B). 26 However, the Wage Order also specifies that provisions relating to determining whether an employee is exempt or non-exempt, minimum wage, and various definitions that impact rate of pay do apply to public agencies. Those

V. RESPONDING TO DYNAMEX

While some important questions remain unresolved, California employers should anticipate a renewed general focus on worker misclassification issues. To minimize the risk of employee misclassification under the wage orders and other employment laws, employers would be wise to review of all of its contingent worker relationships in order to (1) proactively identify potential compliance issues; (2) modify contracting practices to minimize potential risks; (3) implement effective control and monitoring mechanisms; and, (4) establish a record of good faith compliance efforts.

Unfortunately, the Dynamex decision leaves many unanswered questions. Given the significant impact of the decision on California employers, pressure for legislative action will likely continue to grow. At the same time, lower courts and enforcement agencies will continue to consider the application of the ABC test in a variety of contexts in future misclassification proceedings. Thus, employers must pay close attention to judicial and administrative determinations, as well as legislative developments to keep abreast of this developing area of law.

provisions include: the test for exempt/non-exempt status; definitions for key terms, including “hours worked” and “primarily” which are key in evaluating an employee’s entitlement to payment at an overtime rate under California law; minimum wage; meals and lodging; and, penalties.

Polling Results from “Qualifying and Paying Independent Contractors and Temporary Employees”

CSMFO webinar

December 19, 2018

176 locations; 350 estimated participants in live audience