Independent Contractor Misclassification and Compliance News: June, 2019

By MBO Partners | June 28, 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. National Labor Relations Board Finds Arbitration Agreement Unlawful

In a recent decision, the National Labor Relations Board (NLRB) found that an arbitration agreement was unlawful when it was reasonably interpreted to interfere with an employee’s right to file charges with the NLRB. Last year, the Supreme Court said enforcing arbitration agreements under the Federal Arbitration Act (FAA) did not violate the National Labor Relations Act (NLRA) by requiring employees to arbitrate their claims and waive their rights to class action lawsuits.

The NLRA protects workers’ rights to organize and engage in collective bargaining. The issue in this case is slightly different than when the NLRB considered whether the arbitration agreement could be reasonably interpreted to restrict an employee’s right to file charges with the NLRB. The NLRB said that Supreme Court and the FAA did not address arbitration agreements that restrict employees’ access to the NLRB. The NLRB reviewed the language in the arbitration agreement and determined that the arbitration agreement said that it was the exclusive forum for resolving claims and that when reasonably interpreted this restricted an employee’s rights to file charges with the NLRB.

The NLRB did leave open the possibility that a disclaimer or “savings clause” that explicitly allows employees to file claims would be found lawful. Well-drafted arbitration agreements are the best defense against class action lawsuits alleging the misclassification of employees as independent contractors.

2. California Assembly Passes Bill to Codify ABC Test

The California state assembly passed legislation—bill AB 5—which turns the ABC test adopted by the California Supreme Court into law. This legislation would require employers to re-classify thousands of independent contractors as employees if the bill is signed by the governor. AB 5 provides:

For purposes of the provisions of this code and the Unemployment Insurance Code, where another definition or specification for the term “employee” is not provided, and for the wage orders of the Industrial Welfare Commission, a person providing labor or services for remuneration shall be considered an employee unless the hiring entity demonstrates that all of the following conditions are satisfied:

  1. The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  2. The person performs work that is outside the usual course of the hiring entity’s business.
  3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

These three factors, commonly known as the ABC test, was adopted by the California Supreme Court last year in Dynamex Operations West Inc. v. The Superior Court of Los Angeles County, Charles Lee et al, Case No. S222732. The Supreme Court said that a company must establish:

(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.

AB 5 contains a number of exceptions including insurance brokers, physicians, stock brokers, direct salespeople, real estate brokers, and barbers and hair stylists. The bill is being considered by the California Senate. Many businesses are lobbying for additional exceptions.

3. Tennessee adopts 20 Factor Test for Classifying Workers

While media reports tend to focus on California and the ABC test for classifying workers as employees or independent contractors, Tennessee has quietly adopted the more traditional 20-factor test for classifying workers.

The Governor signed into law House Bill 539 which says the Tennessee’s wage and hour statute only applies to when “the services performed by the individual qualify as an employer-employee relationship with the employer based upon consideration of the following twenty (20) factors as described in the twenty-factor test of lnternal Revenue Service Revenue Ruling 87-41, 1987-1.”

The new law sets forth the factors that determine whether a worker is an employee or independent contractor including: control over when, where, and how work is conducted, whether or not a worker needs to be trained to complete a job, and if there is a continuing relationship between the worker and the company. You can find the full list of 20 factors here.

The 20-factor test is a more nuanced test and considers more factors than the ABC test. Employers tend to favor the 20-factor test because it allows them the ability to classify workers based on the totality of circumstances rather than just the three factors of the ABC test.

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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