Commentary: Five Degrees of Independent Contractor Misclassification

The following is a condensed version of a commentary by the author that was published in Law360.com on December 16, 2019. © Copyright 2019, Portfolio Media, Inc., publisher of Law360. It is republished here with permission. A version of the full commentary can also be found here.

“Independent contractor misclassification” is a phrase that is misunderstood, misapplied, and misused. It is used to cover an array of disparate forms of IC misclassification: unpardonable; uninformed; unprepared; unintentional; and unjust.

The phrase may be warranted in situations where companies engage in indefensible conduct, such as where workers are paid under the table or there is no viable argument for paying a worker on a 1099 basis. But the same term also is applied in a few states that de-legitimize IC relationships that are lawful under the laws in most other states and under all federal laws governing ICs. When used in this latter context, the phrase “IC misclassification” is not only unsuitable, but legally unjust.

There are at least three other types of IC misclassification falling between unpardonable and unjust. Thus, the phrase is best understood in the context of a spectrum with at least five degrees of IC misclassification:

Unpardonable – when a business knows it has no reasonable basis for classifying workers as ICs but does so anyway (indefensible wage theft).

Uninformed – when a business has no reasonable basis for classifying workers as ICs but has not taken the time to learn the legal requirements.

Unprepared – when a business understands generally the applicable tests for IC status, is unclear whether or not particular workers are ICs, yet has chosen to classify the workers as ICs without taking any meaningful steps to enhance its level of IC compliance.

Unintentional – when a business tries to understand and satisfy the applicable tests for IC status but, despite good faith efforts, it erroneously misclassifies the workers, usually because it has failed to dot its i’s and cross its t’s in structuring, documenting, and implementing its IC relationships.

Unjust – when workers are properly classified under federal and most state laws but one of the few overly restrictive state law tests for IC status applies or where a state law test is dependent on a single factor that is not clearly defined.

A recent example of unjust IC misclassification – A.B. 5

Recently, California enacted new legislation, Assembly Bill 5 (A.B. 5), which became effective January 1, 2020. That law codifies the California Supreme Court’s decision in Dynamex Operations West v. Superior Court, which was issued on April 30, 2018. As we noted in a blog post that day, Dynamex created a so-called ABC test similar to the labor standards test for IC status in Massachusetts. This type of ABC test requires companies to satisfy each of three strict criteria in order to establish independent contractor status, dramatically changing decades of settled law in California.

The new California A.B. 5 test and the long-established Massachusetts labor standards test for IC status differ substantially from all other states’ ABC tests. In every other state that has an ABC test, the “B” prong has two alternatives: the work performed must either be “outside the usual course of the business for which such service is performed or . . . performed outside of all the places of business of the enterprise for which such service is performed” (emphasis added). However, the “B” prong of the Massachusetts labor standards test and the California test under Dynamex and A.B. 5 requires that a company prove that the contractor’s work is outside the usual course of business in order to establish IC status. It should be noted that the legislature carved out over fifty industries from the Dynamex ABC test. For the businesses with independent contractors in those fifty industries, the legislation now provides that the former test, which weighed and balanced a number of factors, remains the standard for independent contractor status.

However, in a reasoned article entitled “Complexity Is the Cost of California’s Worker Classification Law,” which appeared in Law360 on October 24, 2019, Professor Edward Zelinsky expressed the view that many of the exemptions in A.B. 5 are “opaque” and “ambiguous.” There are many other deficiencies of A.B. 5. One is that each exempted company must satisfy all of up to 12 specified conditions. For example, business-to-business contractors must meet each and every one of 12 specified conditions to qualify for an exemption. Few business-to-business contractors, however, can realistically satisfy every single one of the 12 respective conditions for an exemption from the ABC test. Thus, A.B. 5 is not only more complex than the test it supplanted, it also is under-inclusive in the types of professions and industries it exempts. Finally, it is overly rigid in terms of requiring businesses to fit into a fixed, multi-factor business structure if they wish to qualify for an exemption. 

There is an additional and equally compelling reason why A.B. 5 is unjust: an overwhelming number of ICs would prefer not to be turned into employees, but would rather remain ICs, at least according to two independent studies conducted by the federal government. In a lengthy report to Congress on the contingent workforce, the U.S. Government Accountability Office indicated that it had asked an array of workers the question: “Would you prefer a different type of employment?” 85.2% of independent contractors responded “No” to the question. Similarly, in a 2018 Bureau of Labor Statistics study entitled “Contingent and Alternative Employment Arrangements,” ICs were asked whether they preferred an IC work arrangement or a traditional employee work arrangement. Of those who responded, 89.9% of ICs indicated they preferred IC status.

Even though laws like A.B. 5 are overly restrictive, there are ways to maintain legitimate IC relationships in California and other states. Companies can use a process such as IC Diagnostics™ to restructure, re-document, and re-implement IC relationships in a manner that enhances compliance with IC laws in a customized and sustainable manner, consistent with a company’s business model.