Independent Contractor Misclassification and Compliance News: January, 2020

As the independent workforce continues to grow, so do the issues of worker compliance and misclassification. It is important for enterprises to remain informed about the latest laws, regulations, and developments surrounding these topics. Each month, we’ll bring you the latest news stories from around the web.

1. AB5 Takes Effect

In 2019, California passed Assembly Bill 5 (AB5) that enacted into law the ABC standard for determining if a worker is an employee or independent contractor. Under AB5, a worker is an employee unless the business can show that:

A. The worker is free from the direction and control of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
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 the work performed for the hiring entity.

AB5 took effect on January 1, 2020 amidst an outcry of complaints, criticisms, and lawsuits. The California Trucking Association (CTA) filed a lawsuit claiming that AB5 was preempted by the Federal Aviation Administration Authorization Act (FAAAA). The FAAAA prohibits states from enacting a law or regulation relating to the price, route our service of any motor carrier. A federal court in Massachusetts held that the FAAAA preempted Massachusetts’ ABC test but the Third Circuit Court of Appeals said that the FAAAA did not preempt New Jersey’s ABC test.

A federal judge agreed with the CTA and issued a temporary restraining order and then a preliminary injunction blocking the application of ABT5 to the trucking industry.

Other lawsuits were not successful. Freelancer writers, Uber and Postmates all filed lawsuits but have not yet been able to persuade a court to block AB5. Uber and Lyft have promised a ballot measure to overturn AB5 while legislators are considering ways to amend AB5 in response to complaints.

2. California’s Ban on Arbitration Agreements (AB51) Temporarily Blocked

In addition to AB5, California passed AB51, which banned arbitration agreements in employment agreements. AB51 was also scheduled to take effect on January 1, 2020. Many observers predicted that a court would find that AB51 was preempted by the Federal Arbitration Act (FAA) and rendered unenforceable.

On December 30, 2019, Judge Kimberly Mueller of the US District for the Eastern District of California issued a temporary restraining order (TRO) blocking AB51 from taking effect. Judge Mueller asked for oral arguments and more additional briefing as she considered issued a preliminary injunction that postponed the effective date of AB51 until after the matter is fully litigated.

3. Department of Labor Issues New Joint Employer Rule

The United States Department of Labor (DOL) issued a new rule addressing when businesses will be considered joint employers under the Fair Labor Standards Act (FLSA). A joint employer is an individual or entity that is liable along with the employer for the employee’s wages under the FLSA. The new rule makes is substantially less likely that an employer will be considered a joint employer by the DOL. Under the new rule, the DOL will look at whether a potential joint employer:

• Hires or fires the employee;
• Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;
• Determines the employee’s rate and method of payment; and
• Maintains the employee’s employment records.

In contrast with the old rule, this rule requires a potential joint employer to actually exercise—directly or indirectly—one or more of these indicators of control. Unlike the prior rule, the potential joint employer’s right to act in relation to the employee does not demonstrate joint employer status without some actual exercise of control. Companies that use staffing firms and similar intermediaries are much less likely to be considered to be joint employers under this rule.
The new rule goes into effect on March 16, 2020.