California. A beautiful place and an unusual place.
You learn how unusual California is in the first weeks of law school. Sitting at in classes at University of Maryland – in, um, Maryland – we’d read cases from all over the US (and sometimes world) and you’d start to notice one thing. California’s laws, and rulings, were often different than a lot of other states.
But California is a powerful state and what happens in California often impacts the rest of us.
First, in the US it’s often impossible to avoid somehow coming in contact with California. According to a 2018 article if California was a country it would be the 5th largest economy in the world. Yet California is not a country – it’s a part of the US (no, #CalExit). It seems most of us end up doing a lot of business with California and there are a lot of talented folks there.
Second, while California is considered an outlier in many ways it is often a thought leader for the world. What happens in California often drifts into the US.
So those of us that are business owners and leaders, in and out of California, need to be paying attention here.
Here are some quick facts to keep you in the know which will impact you. As always this is just a general discussion. Get specific legal advice for your business from your lawyer (see my disclaimer at the end).
Fact 1: Independent Contractor Misclassification Is A Big Issue
California’s new law started with a court case. In a 2018 case called “Dynamex Operations West, Inc. v. Superior Court” the California Supreme Court changed the way the courts would test employees vs. independent contractors.
In most states whether someone is an employee or an independent contractor comes down to control. The more control the more likely to be an employee. And when someone crosses the line from independent contractor to employee a lot shifts: payroll taxes, workman’s compensation, discrimination laws, retirement benefits, unpaid leave (if required under law), etc.
States are well aware of these issues and regularly go after companies in attempts to get independent contractors reclassified as employees. From the state’s point of view it is generally better to have more employees as this increases their revenues and oversight.
So it’s not surprising California was litigating this issue. What is surprising is that the Supreme Court jumped in to make a new test for classification and make things easier for the state. Then California’s state legislature jumped in to make it a law that will be even harder for employers to challenge.
So as business owners and leaders we need to know the state is out looking at these issues. It’s big business for them.
Fact 2: The States Are Against You
The California Department of Industrial Relations does a great job summarizing the new law on their webpage. If you are paying people in California to do work for you it’s a highly recommended read.
In their write-up they say what most states would say if pushed “Labor Code section 2750.3 starts with an assumption that all workers are employees, and provides the test that a hiring entity would have to satisfy to prove that the workers are independent contractors.” You read that right – you have to prove you are innocent in these types of cases.
And when it turns to actual litigation the state is usually arguing that independent contractors are actually employees. And the states will go to court on these types of cases.
So know that in many cases it will be your job to prove that you got it right. This means good documents and careful execution.
We’ll get into the documents in the next section.
Fact 3: What You Say Really Doesn’t Matter
Speaking of documents, what you say doesn’t really matter.
As a lawyer I see a lot of contracts. And many of them contain a clause saying “no employee relationship is formed, this is an independent contractor relationship.” And while the value of that clause may be more than the value of the used paper it is printed upon, it’s not worth much.
Like in life and in business actions are more important than words. And that’s that California, and most other states, are looking at.
And in the “do” what really matters is control. The more you control the person, the more likely they are to be an employee.
Yes, get the paperwork to match the “do” you need. Add that clause. But then use your written contract as a checklist to monitor your work with your independent contractor.
Fact 4: California Just Made Their Case Easy
The new California law eliminates and age-old problem the states have had. How much control is too much.
In many states, and federally, there is a multi-factor test. The problem with that being that some factors could point to one classification and the other factors could point to another.
Now California has a really clear law. Expect them to score a lot of wins. It’s basically like home field advantage would be in sports plus your opponent has to wear ankle weights when they are on the field.
Fact 5: You Want To Fix This Before There Is An Issue
So whether you are reading this in California or somewhere else the time to fix this is now. A reclassification is never pretty.
And a reclassification can bring fines, penalties and back taxes.
In my experience many employers have employees classified as independent contractors. The time to fix it is before the states come calling.
What Goes Around Comes Around
I opened those articles talking about when I was sitting in Baltimore, Maryland reading those articles about cases in California. Now I keep offices in DeLand, Florida (between Daytona Beach and Orlando) and Dallas, Texas and serve clients in other states too.
I will not be at all surprised in the courts in Florida, Texas, Maryland and other states start using those slam-dunk cases that California will likely be winning in the near future to help their cases back at home. After all we can expect US courts to soon be giving very pro-state decisions under this new law.
Give your lawyer a call. They’ll be happy to hear from you and they can save you a heap of future problems.
DISCLAIMER: This article talks about legal issues. I am a lawyer licensed in multiple US jurisdictions, but I am not your lawyer unless we have signed an engagement agreement. Please view this material as educational and consult counsel you have retained for advice on your specific facts and circumstances. Do not rely on these general statements as legal advice.
By: The Our Shawn McBride, is the business nerd and long-time business attorney that focuses on changes of ownership in businesses. He works with business owners that know their business is about more than themselves to get ready for their future within the future of business through keynotes, training and personalized solutions. In furtherance of this he hosts The Future Done Right(TM) Show where he collects, digests and gives lessons and insights on The Future of Business. If you want regular content on the future of business subscribe to get new blog posts from us here.
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The Our Shawn is based in DeLand, Florida (between Orlando, Florida and Daytona Beach, Florida) and Dallas, Texas where he keeps offices. You can also find Shawn on webinars or traveling nationally or internationally for speaking engagements.
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