CALIFORNIA CHANGED THE DEFINITION OF “EMPLOYEE” AND EMPLOYERS NEED TO RESPOND DELIBERATELY

Assembly Bill No. 5, Worker Status: Employees and Independent Contractors (“AB-5”) became California law on September 18, 2019 and considerable digital ink has been spilled exploring what it means for the “gig economy” – a short-hand title to lump together a wide range of employment which is temporary and contractual, positions not traditionally considered “employment” under that law.  Much of that discussion has rightly centered around contractual matters and labor issues that are likely impacted by the addition of formerly contractual workers to employee rolls.  It is not my goal here to explore whether this is good or bad law but there are some profound compliance issues that are raised in implementation.  Of particular importance are immigration visa matters and the documentation of authorized worker status for those who suddenly fit the definition of “employee” under California law.

Many companies doing business in California have employees whose status had been considered largely irrelevant for businesses using Internal Revenue Service (IRS) Form 1099-MISC, Miscellaneous Income (“1099”) to document work and compensation.  Some of those workers will now be considered employees under California law and that raises the specter of Immigration and Customs Enforcement (ICE) worksite enforcement and Form I-9 Audits, as well as United States Citizenship and Immigration Services (USCIS) visa Site Visits.  Add to this the impact of having to terminate relationships with operationally significant unauthorized workers and companies doing business in California may need to take immediate action to assess and reclassify workers.

It is inadvisable though to do this without consideration of the legal ramifications of reclassification and potential termination.  There are proven, effective strategies for managing Form I-9, Employment Eligibility Verification (“I-9”) assessments and reverifications and improper administering of the transition could lead to discrimination claims, organized labor claims, and breach of contract problems.  These matters must be approached systematically and with careful consideration of the relevant and particular facts.  This piece then is meant to generally inform and as a broad guide on how to approach the problem.  It is strongly recommended that companies seek legal counsel before taking remedial action.

Outside of the AB-5, what is an “employee”?

Whether someone is an “employee” under U.S. federal law or that of most of our states, can be challenging to determine.  The common law test is whether an employer has control over the employee’s work: who, what, when, where, and how the work is performed.  That basic understanding is incorporated into agency definitions such as that of the Internal Revenue Service (IRS) which hinges their test on the “degree of control and independence” that “fall into three categories:

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?”

See https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee .

The U.S. Department of Labor (DOL) notes that an employer has to look at the relationship between employer and the person performing the task to determine whether an employer – employee relationship or a contractor relationship exist.  This is a factor test, exploring:

1. The extent to which the services rendered are an integral part of the principal’s business.
2. The permanency of the relationship.
3. The amount of the alleged contractor’s investment in facilities and equipment.
4. The nature and degree of control by the principal.
5. The alleged contractor’s opportunities for profit and loss.
6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
7. The degree of independent business organization and operation.

See https://www.dol.gov/whd/regs/compliance/whdfs13.htm .

The determination of who is an “employee” can be much more involved and there are a number of good articles out there to explore the matter more fully.  However, employers often spend little time analyzing this question because the determination seems to be easy to make.  Many businesses assume they are hiring an “employee” because the work is being performed under their direction or that of their subordinates.  Such companies are hiring specific people, to do specific tasks, for specific pay, for a duration that exceeds the particular project in question.  They recognized this as an employer – employee relationship and this arrangement is so normal that hiring someone for particular tasks, outside of our regular control feels very different.  It feels like a contractual relationship because its duration is set by the task, the company knows how much they are willing to pay for it, and the contractee is more concerned with the execution than the process by which the tasks are completed.  Both parties know, for example, that the company doesn’t have to fire someone who fails to perform the contract to their satisfaction or who wants much more money to do follow-on work.  Such things are indicators that there is no employer – employee relationship.

How do we figure out which non-employee workers are now “employees” under the AB-5?

The AB-5 follows on the heels of the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles County, No. S222732 (Cal. Sup. Ct. Apr. 30, 2018) in which the court established a three-part test of whether a worker is an independent contractor:

1. Free from direct control in the performance of the work;
2. The work must not be within the usual course of business; and
3. The worker must have an independent business of the same type as what is being done on the independent contract.

Under this test, some occupations would clearly remain contract jobs.  For example, a violinist who played at a number of restaurants would not likely be an “employee,” merely because they played those locations on a set schedule.  A landscaper who provides services to a number of businesses would not likely be one either.  However, suppose our violinist starts playing every night at the same restaurant and, suppose they play a set repertoire, one coordinated with management to fit the evening’s entertainment and food theme?  What if our landscaper devotes their attention to just this company’s businesses, implementing a multi-year marketing strategy for establishing their brand?  Things may have changed, even under the IRS and common law tests but here, we may fail all three of the Dynamex tests since:

Our violinist would be taking direction on when, where, and how the music was performed.  The music likely falls within the restaurant’s usual business and the violinist may no longer have a truly independent business but be wholly reliant upon the restaurant for compensation.

Our landscaper relationship may similarly fail the test since the company would be directly controlling the work, the work performed is part of a broader, long-term branding strategy, and the landscaper may no longer be performing that work on an independent basis.

What are some compliance and regulatory enforcement consequences of the AB-5?

First and foremost, employees are subject to the I-9 protocols.  Dynamex has been effective since April 2018 and AB-5 becomes effective on January 1, 2020.  It is imperative that those who do business in California assess their workforces to determine whom is likely an “employee” and make a business decision to either clarify the contractual relationship or place them on an I-9.  Businesses large and small need to do this in a deliberate, careful way that avoids discrimination pitfalls, does not improperly exclude persons who should be covered as employees, and that documents the reason and method employed for bringing the company’s workers together in one, articulable pool of employees.

Secondly, there may be significant visa issues involved in the process of placing employees on I-9s.  Some foreign nationals work on 1099s without work authorization.  If, under Dynamex and the AB-5, they are employees, a company may incur liabilities for unauthorized workers on their rolls or run afoul of labor laws by keeping them on 1099s if they can’t execute an I-9.  Navigating these legal waters, without running aground on immigration matters or DOL regulations, requires a deft hand at the helm and a competent Quartermaster at the charts.

Thirdly and finally, AB-5 implementation is highly visible and missteps may have significant business reputation costs.  Loss of employment by large numbers or specific sets of employees may have profound consequences in recruiting, marketing, and legislative affairs.  The simple act of obtaining I-9s or reviewing the visa statuses of contract employees can bring unwanted attention to a company which is merely trying to comply with changes in the law.

Conclusion

Companies doing business in California, whether small or large, cannot afford to do nothing in response to the AB-5 but responding to it is fraught with immigration, labor, and tax pitfalls for which legal guidance seems appropriate.  Potential criminal and civil liabilities for knowing violations can be significant.  Even innocent violations can lead to fines and costly business operations disruptions.  Please contact us over here at Green and Spiegel if we can help with liabilities assessments or explore ways of mitigating the negative effects of these changes in California law.