Independent Contractor Misclassification and Compliance News: July, 2019

By MBO Partners | July 31, 2019

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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 Bill to Address Dynamex Moves Forward

In 2018, the California Supreme Court, in Dynamex Operations West Inc. v. The Superior Court of Los Angeles County, Charles Lee et al, Case No. S222732, adopted the ABC test for classifying workers a employees or independent contractors.

The ABC test makes it hard to classify a worker as an independent contractor and many businesses in California have been urging the legislature to clarify the test. In May, the California Assembly passed a bill that adopted the ABC test but added some exceptions. In July, the California Senate Labor, Public Employment, and Retirement Committee voted to move forward with the bill with even more exceptions. The bill from the Senate committee provides for an exception for professional services if they meet the following requirements:

  • (A) The service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  • (B) The service provider is providing services to the contracting business rather than to customers of the contracting business.
  • (C) The contract with the service provider is in writing.
  • (D) If the work is performed in a jurisdiction that requires the service provider to have a business license or business tax registration, the service provider has the required business license or business tax registration.
  • (E) The service provider maintains a business location that is separate from the business or work location of the contracting business.
  • (F) The service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.
  • (G) The service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity.
  • (H) The service provider advertises and holds itself out to the public as available to provide the same or similar services.
  • (I) The service provider has no other financial relationships with the contracting business.
  • (J) The service provider can negotiate its own rates, provided that the rate is equal to or greater than two times the minimum wage for hours worked.
  • (K) The service provider can set its own hours and location of work.

These requirements need further clarification and present some challenges for engaging with independent contractors, but it is encouraging to see accommodations to allow professional independent contractors to continue to perform services in California. The bill needs to be considered, amended, and adopted by the full California Senate and then reconciled with the version passed by the California Assembly. Both the Assembly and the Senate would need to pass the same version of the bill to send it to the governor for his signature before the bill would become law.

2. Texas Rule for Marketplace Platforms

The Texas Workforce Commission (TWC) rule that classifies workers who use a marketplace platform and its digital network to provide services are independent contractors and not employees for the purposes of unemployment compensation went into effect in July. The new rule defines a “digital network”, “marketplace platform”, and “marketplace contractor” as follows:

  • (A) The term “digital network” means an online-enabled application or website offered by a marketplace platform for the public (including third-party individuals and entities) to use to find and contact a marketplace contractor to perform one or more needed services.
  • (B) The term “marketplace platform” means a corporation, partnership, sole 10 proprietorship, or other entity operating in this state that:
    • (i) uses a digital network to connect marketplace contractors to the public (including third-party individuals and entities) seeking the type of service or services offered by the marketplace contractors;
    • (ii) accepts service requests from the public (including third-party individuals and entities) only through its digital network, and does not accept service requests by telephone, by facsimile, or in person at physical retail locations; and
    • (iii) does not perform the services offered by the marketplace contractor at or from a physical business location that is operated by the platform in the state.
  • (C) The term “marketplace contractor” or “contractor” means any individual, corporation, partnership, sole proprietorship, or other entity that enters into an agreement with a marketplace platform to use the platform’s digital network to provide services to the public (including third-party individuals or entities) seeking the type of service or services offered by the marketplace contractor

A marketplace contractor is an independent contractor and not an employee for the purposes of Texas unemployment compensation if all of nine conditions are met. The specifics of those conditions can be found here.

While some states have adopted laws that protect digital marketplaces, the Texas Workforce Commission is among only a few state agencies that have adopted regulations to protect marketplace platforms.

3. New Jersey Task Force on Misclassification Issues Recommendations

In 2018, Governor Murphy of New Jersey established a task force to investigate and make recommendations to address the misclassification of workers as independent contractors. The task force had meetings, held public hearings and worked with the New Jersey Department of Labor to develop its recommendations. The task force recommendations include:

Targeted Education and Public Outreach: Create a hotline, webpage, and email address to report misclassification; require employers to post notices alerting workers to the issue (through legislation discussed below); raise public awareness through press strategy.

Strengthening State Contracting: Require entities that contract with the state or receive state funding to confirm that they are aware of the legal standard for proper classification of workers based on the ABC test, with potential loss of funding or contract termination if misclassification is found.

Interagency Coordinated Enforcement: Conduct on-the-ground investigations and joint enforcement sweeps with multiple agencies, working together to elicit facts and obtain information using each agency’s jurisdictional knowledge and expertise.

In addition, the task force has 16 regulatory and legislative recommendations including requiring public posting of notices about misclassification, imposing liability on employers who rely on companies that misclassify in their supply chain, and giving the DOL the ability to issue stop-work orders.

The task force focused on misclassification by disreputable employers who seek to reduce costs by avoiding payroll. Any proposed changes should include consideration for companies who properly use independent contractors to take advantage of their unique skills and experience.

For more information, check out our resources page on misclassification and compliance, or contractor engagement best practices. If you have any questions about engagement, classification, or management of your independent workforce, we’re always here to help.

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