Independent Contractor Misclassification and Compliance News: February, 2020

By MBO Partners | February 28, 2020

misclassification and compliance news

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. Preliminary Injunction Issued to Block Enforcement of California’s Ban on Arbitration Agreements in Employment Contracts

In 2019, California passed a law, AB51, which banned arbitration agreements in employment agreements. The law was also scheduled to take effect on January 1, 2020. In December, Judge Kimberly Mueller of the US District for the Eastern District of California issued a temporary restraining order (TRO) blocking AB51 from taking effect.

The court has recently issued a preliminary injunction prohibiting AB51 from taking effect. A preliminary injunction requires that a party show that (1) it is likely to succeed on the merits; (2) it is likely to suffer irreparable harm in the absence of preliminary relief; (3) the balance of equities tips in the party’s favor; and (4) an injunction is in the public interest.

The effect of a preliminary injunction is that the law does not take effect while the case is being litigated. The issuing of a preliminary injunction indicates that the judge thought the objections to the law were likely to success on the merits and that ultimately, the law would not be enforceable.

This is good news for entities that engage with independent contractors who have a independent contractor agreement with an arbitration clause.

2. New York City Provides Guidance on Independent Contractor Protections from Discrimination and Harassment

New York City’s Human Rights Law was amended effective January 11, 2020 to protect independent contractors and freelancers from discrimination and harassment. New York City recently provided a fact sheet with guidance about the new law.

Under the new law, Independent contractors and freelancers are protected from employment discrimination and harassment. In addition, employers are required to have their independent contractors complete annual sexual harassment training.

An employer can be liable for the acts of an independent contractor if the acts occurred in the course of the work for the employer and the employer had actual knowledge of the discriminatory acts and acquiesced in the conduct.

3. The Impact and Adjustment to California’s AB5

On January 1, 2020, California’s new law addressing the classification of workers as employees or independent contractors went into effect. There has been widespread criticism of the new law which adopts the ABC test for determining if a worker is an employee or independent contractor. Under AB5, a worker is an employee unless the business can show that:

  1. 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 has had a broad effect. In addition to the higher profile cases of Uber and Lyft drivers and freelance writers, Instacart workers may need to be reclassified as employees; and musicians have started a petition to be exempt from AB5.

AB5 creates an exception from the ABC test for “bona fide business to business relationships” when a freelancer or independent contractor has formed a business entity and meets 12 other requirements.

There are reports of an increase in the number of limited liability companies (LLCs) being formed since AB5 became effective. While forming an LLC is an important part of showing a bona fide business to business relationship, there are additional requirements and neither businesses nor freelancers should rely solely on forming an LLC to demonstrate compliance with AB5.


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