The following Tip builds on previous Tips and captures the concern with whether a worker is an Employee or an Independent Contractor; it takes little effort to see how the resolution of this issue is important to many fields, including the real estate field.
Returning to the Issue: Employee or Independent Contractor?
In a prior article[1], we wrote about the impact of a decision that concluded that a given worker was an Employee (EE) or an Independent Contractor (IC). This decision was of recent origin out of the California Courts; however, the issue as to one being an EE or IC is not a new topic. As we mentioned in the prior article,[2] the distinction and determination of a worker being classified as an EE or IC has huge ramifications in many areas of our society. Such a conclusion impacts many areas of business, taxation of individuals and companies, benefits that are or are not provided for workers (e.g., retirement payments, vacation, sick leave, family leave, withholding, employment taxes), and much more. The earlier article addressed these issues. Suffice to say for now that this demarcation as an EE or IC is very important to the worker, the company involved with the worker, relevant governments (as to tax and other issues), liability concerns, etc.
What has changed since the publication of our earlier article are decisions in various courts and governmental bodies in the US and outside the US regarding this classification enigma. Thus, we return to visit this issue and to update recent events that have clouded the issue of whether a worker is an EE or IC.
Summary of the recent history of the EE vs IC issue:
Because the earlier article focused on the important case of Dynamex Operations West, Inc. (Dynamex),[3]we use that as our starting reference to deal with the more recent cases and events on the timeline dealing with this EE vs IC issue.
1.
Dynamex addressed this issue in the context as to whether workers that delivered goods to homes and businesses were to be treated as EE or IC. The Court recognized the importance of this decision when it stated:
“Under both California and federal law, the question whether an individual worker should properly be classified as an employee or, instead, as an independent contractor has considerable significance for workers, businesses, and the public generally.”[4]
The Dynamex Court reviewed the foundational standards for reaching a conclusion as to whether a worker should be held to be an EE or an IC. The Court moved from the traditional standards or test for an EE to a new standard, referred to as the ABC standard. The Court defined this standard as:
“…we conclude that in determining whether, under the suffer or permit to work definition, a worker is properly considered the type of independent contractor to whom the wage order does not apply, it is appropriate to look to a standard, commonly referred to as the “ABC” test, that is utilized in other jurisdictions in a variety of contexts to distinguish employees from independent contractors". Under this test, a worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes:
(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 such work and in fact;
(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 the work performed for the hiring entity.”[5]
It is not the intent of this Tip to review and question the position of the Court as to the use of this ABC test. (Historically, as stated in the Dynamex Case, many courts have used, to determine the status of a worker as an EE or IC, the degree of control, among other factors, that an employer has over the worker. However, our focus is not on this change of the standard to determine the issue. Rather, the important point for our examination in this Tip is that the Court chose to use this ABC test and in so doing, the Court concluded that the workers, delivering the goods as noted, were EEs. In reaching this decision, the Court created a volcanic eruption of concerns for companies such as Dynamex, but also for other companies involved in any delivery issues, such as the delivery of people (Uber, Lyft, etc.), food products (DoorDash, Uber Foods, et al), goods (Amazon, UPS, Fed X, et al) and others involved in the delivery area. Further, workers were now finding, under the reach of this Dynamex decision, that they would be entitled to benefits as EEs; but they also faced concern as to whether the existing company, e.g., Uber, would continue to “employ” them.
2.
The Dynamex controversy was not undertaken in a vacuum, devoid of other similar conflicts. Certainly, with the State of California involved, given its size and number of workers, it was very important as to this issue of EE vs IC. However, other states, such as New York and New Jersey, were also examining this issue and the implications to their state governments. The State of New Jersey, for example, had already asserted, prior to Dynamex, that Uber owed New Jersey almost $650 million dollars for unpaid employment taxes and interest, along with costs for disability insurance.[6] There have been many other cases[7] and governmental positions asserting that workers in given settings, such as described above, were to be treated as EEs. This conclusion meant big problems for not only the Dynamex and Uber-type companies, but other companies in similar situations.
3.
After the Dynamex decision, California passed a worker classification Act (AB 5).[8] This Act was designed to support the position of treating workers, such as those in Dynamex, as EEs, not as an IC. What this meant, at least in California, is that companies like Uber et al would face this legislative hurdle of AB 5 and the Court decision of Dynamex. AB 5 further exacerbated the concern by delivery companies, that workers might not have an opportunity to work on a part-time basis (gig), shareholders in delivery companies such as Uber, and so forth. Following AB 5, the questions were: What moves would Uber and similar companies undertake, given the California Dynamex and AB 5 positions?
4.
Uber, following the legislation and Dynamex decision, informed the State of California that it was moving out of California; it conveyed the message that Uber could not do business under its model of treating drivers as EEs. The financial costs would overwhelm Uber’s model and it could not function.
5.
Members of the public who relied on Uber, Lyft, and other such companies that are in the delivery business were very upset to hear that many Uber-type companies were leaving California. The use of Uber, for example, as a transportation means was very important to many people in California. Many drivers for Uber and similar companies realized that they might not have the Gig position, part-time or full-time, with these changes. Thus, many individuals expressed their concern to the legislators.
6.
The Legislature in California reacted by putting for a proposition to the public to vote to see if the public favored a change from the harsh decision of Dynamex and AB 5. Possibly there could be other classifications or other exceptions that would allow the Uber-type companies to function in California. This approach would be under their model that the drivers would not be treated as EEs and thus the companies would not have the financial burden to treat such workers as EE with the concomitant tax and other EE burdens. To support this approach, Proposition 22 (Prop 22) was placed on the ballot in California. The public approved the same, thus allowing for a modification of the AB 5 position, at least for some companies, such as Uber, Lyft, and DoorDash.
7.
Without examining in detail the workings of Prop 22, it is clear that this Prop was designed to address (and solve) a problem: How does California keep Uber and similar companies in the State? While addressing this issue and the implications of Prop 22, additional opposition was developing in California (and elsewhere) to stop any changes from the AB 5 position.
8.
A California court decision in August 2021 held that the changes made by Prop 22 in Nov. 2020, that provided exceptions from AB 5, allowing some companies to treat their workers as IC, is Unconstitutional!
...Now What?
It appears this matter is headed to the Supreme Court in California. If the California Supreme Court hears this case, there will be many interested viewers—both in California and throughout the USA.
MORE TO FOLLOW….
Mark Lee Levine
==================================================================================Footnotes:
[1] Levine, Mark Lee and Segev, Libbi Levine, Recent Cases May Eliminate Deliveries/ Rides by Amazon, Lyft, Uber. See prior Tip by Levine in this Mark Lee Levine Blog.
[2] Id.
[3] DYNAMEX OPERATIONS WEST, INC. v. Superior Court, 416 P.3d 1, 4 Cal. 5th 903(2018). This case, though dealing with the EE or IC issue involved in part the focus on whether the case could be certified as a class action. Because the purpose of this Note is to address the IC vs EE issue, the class issue in the Dynamex Case is not discussed in this Tip.
[4] Id. The Court further cited the importance of this issue when it referenced: “See United States Department of Labor, Commission on the Future of Worker-Management Relations (1994) at 64.
“The single most important factor in determining which workers are covered by employment and labor statutes is the way the line is drawn between employees and independent contractors”] <https://digitalcommons.ilr.cornell.edu/key_workplace/2/> (as of Apr. 30, 2018).”
[5] Id. at 917.
[6] “New Jersey Says Uber Owes Nearly $650 Million In Taxes And Interest, That Its Drivers Are Employees, https://www.forbes.com/sites/janetwburns/2019/11/14/new-jersey-says-uber-owes-nearly-650m-in- taxes-and-interest-that-its-drivers-are-employees/#5c20734a1ecd
[7] See Supra Note 1 in our prior article; California’s gig economy bill could fundamentally change Uber and Lyft
Allison Matyus September 11, 2019, https://www.bing.com/search?q=california%E2%80%99s+gig+economy+bill+could+fundamentally+change+uber+and+lyft&form=EDGEAR&qs=PF&cvid=c302857527614622b5e42246515e016c&cc=US&setlang=en-US&elv=AQj93OAhDTi*HzTv1paQdnhn8IZVjDle5twWm1ulh3IW8zDzTr4PxkLnVABOvp*rwXPPMXTqFqCCGJg6Mq7BPdcX5VFpzb9*mU5uuXbVwvuy
[8] California AB 5, Opportunity to Work Act.