Independent Contractor Misclassification and Compliance News: September, 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. California Passes AB2257 to Amend AB5

California passed AB2257 with a variety of amendments to AB5, the statute that made the ABC test the standard for classifying workers as employees or independent contractors in California. The ABC test requires a business/hiring entity that wants to engage with a person who is an independent contractor to show that:

(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

(B) The person performs work that is outside the usual course of the hiring entity’s business.

(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

AB2257 creates a number of new exceptions to this test including exceptions for recording artists, songwriters, composers, record producers, musical engineers and mixers, vocalists, photographers working on recording photo shoots, radio promoters, and other individuals engaged in creating creative, marketing, or independent music publicist services.

It is important to note that AB2257 did not materially change the bona fide business-to-business exception under AB5, which is the exception that is available to independent contractors who don’t fit within the defined categories of AB5 or AB2257.  

2. United States Department of Labor Proposes New Rule for Classifying Workers

The United States Department of Labor (DOL) has proposed a new rule for classifying workers as employees or independent contractors. The new rule has been published and the DOL is now receiving comments on the new rule.

The proposed regulations say that the determination is based on the economic reality and that the economic reality should be determined by considering:

1. The individual’s control over the work and
2. the individual’s opportunity for profit and loss.

If these factors are not determinative (if they point in different directions), then these factors should be considered:

1. Amount of skill required,
2. the permanence of the relationship and
3. whether the work is part of an integrated unit of production.

Commentators have different opinions on the relative impact of this new rule, although no one has suggested that the new rule makes it harder to classify workers as independent contractor.

In addition, the long-term effect of the proposed rule will depend on the outcome of the election. If President Trump is not re-elected, look to the new administration to offer new rules to replace the proposed rules.

Finally, the proposed rule does not change state laws so companies doing business in California or Massachusetts will still be subject to their states’ strict ABC test, and companies in other states will have to comply with their states’ laws relating to classifying workers as employees or independent contractors.

3. Calls for a Single Standard or Third Classification

In the middle of the turmoil in California, some commentators have advocated for different solutions. Ike Brannon, in The False Bogeyman Of The Gig Economy, calls for a single national standard for classifying workers as employees or independent contractors: “A national standard that clearly delineated the difference between an independent contractor and an employee, and created a safe harbor that could be easily satisfied by people who want to be considered independent contractors, would provide certainty to independent contractors and the companies that hire them. Ending the uncertainty in the contingent labor market would boost employment and economic growth at a time we desperately need both.”

Brannon’s approach would make engaging independent contractors far less complicated—companies would not have to deal with the different standards and criteria in each state in which it engaged independent contractors.

With a different approach, Uber CEO Dara Khosrowshahi argued for a “third way” for gig workers. Khosrowshahi proposed that, “gig economy companies be required to establish benefits funds which give workers cash that they can use for the benefits they want, like health insurance or paid time off.” Khosrowshahi’s approach would blur the difference between employees and independent contractors and create more administrative work for companies who engaged with gig workers.

Both approaches are worth considering. Some workers may need to be protected from companies who try to take advantage of them but many independent professionals would benefit from less complexity and making it easier for companies to engage with them.