Are You Ready? States Crack Down on IC Compliance

Are you ready for the state crackdown on Independent Contractor compliance?

Recently, 12 states including Connecticut, Illinois, Massachusetts, Maryland, Minnesota, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Virginia and Washington decided to create a task force that will end unfair labor practices and tighten the grip on worker misclassification. In addition, earlier this month the state of California Supreme Court issued a unanimous decision that could make it substantially more difficult for businesses in California to show that their workers are independent contractors rather than employees. On April 30, 2018, CA Supreme Court issued their employee-friendly independent contractor opinion in Dynamex case1. Every worker is presumed to be an employee unless the hiring party proves three evidentiary facts. The impact could be felt in the gig economy, where many highly skilled, talented independent contractors are heavily used by firms.

California’s top court adopted the “ABC” test for determining whether workers are independent contractors or employees. The state ruled in favor of using a tougher test on misclassification that could cast doubt on workers’ arrangements. California had previously used the multifactor “Borello” test, since 1989. Independent contractors are commonly used by staffing buyers and on-demand, gig economy firms such as Uber and Lyft. But some say the ruling could mean more lawsuits.

The ruling calls into question numerous existing independent contractor relationships in California, exposing companies to liability and paving the way for a new wave of wage-hour class actions by making it easier to establish commonality and predominance.

The ABC Test

The ABC test, according to the court, allows a worker to be properly classified as an independent contractor (if no state wage order applies) only if the hiring entity establishes:

(A) 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) The worker performs work that is outside the usual course of the hiring entity’s business;

(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.

The ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if all three prongs of the test are satisfied.

The twelve states involved – Connecticut, Illinois, Massachusetts, Maryland, Minnesota, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Virginia, and Washington – are arguing that intentional misclassification gives companies an unfair advantage and takes money from workers and state employment taxes. These states are trying to ensure that businesses follow the rule of law so they are not unfairly positioned against those businesses that are not. Some business groups argue that upholding the decision will lead to confusion, increased litigation and more. Some argue that this type of ‘legal climate’ could potentially slow the creation and continuation of independent contractor relationships in the country at a time when these types of gig economy relationships should be encouraged to expand and flourish. We have seen some of the most innovative, entrepreneurial, and productive advances in recent years in our nation’s economy, which have evolved from new and expanding independent relationships between individuals and employers.

If your organization needs some help ensuring that you are ready for the crackdown on IC Compliance, ClearPath Workforce Management risk mitigation services bridge the gaps to enable compliant engagement of this highly skilled talent and to expand your talent supply chain. ClearIC™ can automate and simplify the Independent Contractor evaluation process while mitigating your risk via our full-service IC vetting process. Contact ClearPath for a complimentary 1:1 review of your current worker status.