California Employers: The federal Department Of Labor’s Final Rule For Worker Classifications Does Not Eliminate The Requirements Under California’s ABC Test

The U.S. Department of Labor (“DOL”) just announced a “final rule” setting forth the standard for worker classifications – employee versus independent contractor – under the Fair Labor Standards Act (“FLSA”).  The FLSA establishes federal minimum wage, overtime pay, recordkeeping, and youth employment standards for the public and private sectors.  All employers in the United States must abide by the FLSA; however, many states, including California, set forth more stringent requirements for worker classifications. 

In California, Labor Code section 2776(a) establishes the “ABC” test for worker classifications.  The ABC test requires a worker to be classified as an employee unless:

(A)        the worker 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;

(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 by the hiring entity.

In contrast, the DOL final rule reaffirms the use of an “economic reality” test under federal law to determine whether an individual is in business for him or herself or is economically dependent on an employer for work.  Two core factors are examined to determine whether a worker is economically dependent and therefore properly classified as an independent contractor under federal law: (1) the nature and degree of control over the work; and (2) the worker’s opportunity for profit or loss based on initiative and/or investment.  Unlike California, under the DOL rule, there is no requirement that the worker performs work outside the usual course of the hiring entity’s business or that the worker is customarily engaged in an independently established business of the same nature. 

When the two core factors of the economic reality test result in conflicting classification, the DOL final rule sets forth additional factors that may be considered: (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship between the worker and the potential employer; and (3) whether the work is part of an integrated unit of production.

Although the new DOL final rule is set to take effect on March 8, 2021, 60 days after its announcement, much uncertainty remains as to whether the DOL final rule will take effect under President-Elect Biden’s Administration.  Adding to the uncertainty, there is pending federal legislation (Protecting the Right to Organize Act aka PRO Act), which has already passed in the House of Representatives and if enacted will impact the viability of the new DOL rule and affect employers nationwide.   Either way, California employers must typically adhere to the stricter ABC Test when determining if a worker in California can be classified as an independent contractor.  Further, employers must use extra caution when using the independent contractor classification, as improper classification may provide a basis for legal action – including a representative action under the Private Attorneys General Act that carries with it substantial statutory penalties and provisions that allow for the recovery of attorneys’ fees.

Employers can direct their questions about classifications of independent contractors to the authors or their usual trusted counsel at AALRR.

This AALRR post is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process. 

© 2021 Atkinson, Andelson, Loya, Ruud & Romo

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