wills and trusts and estate planing can avoid probate
Business Planning

New Bill Stands to Dramatically Alter Worker Classification in California—and Potentially the Entire Nation

State legislators in California recently passed a controversial new bill that requires many companies like Uber and Lyft, which rely primarily on independent contractors, to reclassify their contractors as employees. The bill, known as Assembly Bill 5 (AB 5), stands to upend the business model of the affected companies in California and potentially impact the nature of the worker-employer relationship at a national level as well.

The legislation, which was approved in the state Senate and sent to Governor Gavin Newsom, who has pledged his support, is expected to go into effect starting on January 1, 2020. AB 5 stands to impact at least one million workers, including not just ride-hailing drivers, but also those working in construction, food delivery, janitorial, nail salons, and various franchise operations.

AB 5 codifies a 2018 California Supreme Court decision that adopted a three-part standard for determining which workers should be treated as employees. Under the new standard, known as the “ABC test,” a worker is an employee if his or her job forms part of a company’s core business; if the employer directs the way the work is done; or if the worker has not established an independent trade or business.

A dramatic increase in labor costs

Unlike contractors, workers classified as employees are entitled to benefits like minimum wage, overtime pay, sick leave, unemployment insurance, and workers’ compensation. Employers are also required to pay into an employee’s Social Security or Medicare taxes.

Requiring companies to offer such benefits to the majority of their workforce is expected to increase the labor costs of affected companies by up to 30%. And because these companies have built their entire operations around inexpensive, independent labor, it could force some companies out of business entirely.

Other states have adopted laws extending certain benefits such as minimum wage and unemployment insurance to contractors, but California’s new legislation completely changes the employment relationship. What’s more, it gives the state and cities the right to sue companies for misclassification, overriding arbitration clauses that many companies have used to protect themselves from worker complaints.

A potential precedent

Lawmakers across the country have been closely monitoring AB 5, and the California law is likely to set a precedent for other states to follow. It could also be the catalyst for similar legislation at the federal level that’s now pending in Congress, and several Democratic presidential candidates have already endorsed AB 5. 

But businesses in California aren’t conceding defeat just yet. Uber, Lyft and DoorDash pledged $90 million to support a statewide ballot initiative for 2020 that would effectively exempt them from the legislation. And Uber’s legal team said they don’t intend to reclassify their workers, even after the law goes into effect. The company also plans to continue litigating misclassification claims in arbitration, as it has previously done. 

Thanks to intense lobbying from the California Chamber of Commerce and trade associations, a number of professions will be exempt from AB 5. Some of the most notable exempted occupations include physicians, dentists, veterinarians, psychologists, engineers, lawyers, accountants, architects, real estate agents, investment advisors, insurance brokers, hair stylists, barbers, and certain certain construction workers. 

Safeguard your company

The passage of AB 5 highlights the critical importance of correctly classifying your workers, as other state’s may hop on this bandwagon or begin to look at employee classification as a source of increasing state revenues from taxes. This applies not only to popular gig professions like ride-hailing and food delivery, but for all businesses that use independent contractors, including yours. It also makes it even more vital to have airtight independent contractor agreements in place for every contractor you hire, without exception, and to consider other safe harbor strategies.

If you’re a business owner in California and use independent contractors in your business, contact us right away to review your employment practices. We specialize in helping business owners stay in full compliance with constantly evolving employment laws. Whether you need assistance with worker classification, need new agreements created, want your existing agreements reviewed, or simply have questions about the current legal landscape, you can rely on us. 

We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.

Read More
gig workers
Business Planning

DOL Says Gig Workers Are Contractors, Not Employees

This week the Department of Labor issued an opinion letter signaling that it’s siding with business owners when it comes to determining whether gig workers like Uber drivers should be classified as employees or independent contractors.

The DOL letter concluded these workers are contractors, not employees, and as such, they’re not entitled to federal protections like minimum wage and overtime pay. This is a reversal of the DOL’s position under Obama, which held that many gig workers should be classified as employees.

Though the letter was issued to an unnamed company which requested the DOL’s guidance, the business community looks to such letters for insight into the department’s stance on hot-button issues. While DOL policy prevented the company’s name from being revealed, the business in question reportedly runs a mobile platform connecting customers with gig workers offering residential cleaning services.

Though this platform is not exactly the same one used by Uber, Lyft, and Handy, the letter sends a clear message to the industry: Under Trump, the DOL doesn’t intend to crack down on these types of companies for classifying their workers as contractors. 

What does this mean?

This doesn’t mean that gig workers can no longer sue companies for misclassification, only that the department doesn’t plan to aggressively target operations with a similar business model. The message comes at a particularly critical time, as both Lyft and Uber are taking their companies public and want to assure investors that their underlying business model is legally sound.

Up until recently, regulatory agencies did little to enforce worker classification laws. But with Obama’s election and the rapid increase in the number of businesses that rely primarily on independent contractors for labor, there’s been heightened scrutiny from regulatory agencies at all levels. 

Such aggressive enforcement by the DOL was halted soon after Trump took office, and this new letter seems to make the Trump administration's relaxed position even more clear. That said, you shouldn’t assume you no longer have to worry about properly classifying your workers, no matter what kind of operation you run.

Outside of potential lawsuits from workers, there are numerous other federal and state agencies with the power to penalize you if you fail to properly classify your workers, even if done by mistake. For example, because the agency might miss out on your share of a worker’s Social Security and Medicare taxes, the IRS has a keen interest in making sure you maintain the proper employment classification—and they can audit and fine you if you aren’t careful. 

What should you do?

Even though the Trump DOL is taking a less aggressive position, if you use independent contractors, you must remain vigilant about proper worker classification. However, the recent letter does shed some light on what the department will be looking for when deciding similar cases.

To support its conclusion that the workers in question were not employees, the DOL cited several facts about the unnamed company’s workforce: the workers had the freedom to choose when, where, and how long they worked; they provided their own equipment; and the company did not require the workers to undergo a training program.

While there’s no single test to determine a worker’s proper classification, it generally comes down to the level of control you have over those who work for you. If you control or direct how the work gets done, the worker is more likely to be classified as an employee.

With independent contractors, you’re only permitted to control the end result of their work, not the manner and methods they used to complete the job. One of the best ways you can safeguard yourself against misclassification is by always using a properly drafted contract with every single person you hire, without exception. 

The contract should clearly define the terms and parameters of the individual’s role and relationship with you, including a clear scope of the work involved, the job’s time frame, and the terms of payment. And as highlighted by the recent DOL letter, the agreement should also clearly state that the worker is responsible for his or her own workplace, equipment, and expenses.

Before you sign on the dotted line, you should always allow us to review and if needed, revise your independent contractor agreement, even if it was created by another lawyer.

Better safe than sorry

While the DOL letter will likely be heralded as great news by the burgeoning collection of companies (perhaps even yours) that have predicated their business model on the use of independent contractors, you shouldn’t let your guard down. 

Whether you need new contracts created, want your old ones analyzed, or have questions about the current legal landscape, you should meet with us. Contact our office today to schedule your appointment.

We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.

Read More