They’re Yours, They’re Mine or They’re on Their Own: More On Employee vs. Independent Contractor

By: Jeff Chang

Previously, in Yours, Mine or Ours?, we examined the basics of “who” your  employees are for employee benefits purposes. We also discussed some of the adverse tax and business consequences that can befall employers who either don’t understand who their common-law employees are or attempt to treat their common-law employees as someone else’s employees. Hopefully, we have convinced many of you that it is better to understand and analyze these issues rather than assume that your outsourcing arrangement works for all purposes.

The recently issued California Supreme Court case of Dynamex Operations West v. The Superior Court points out yet another potential area of confusion: the differing treatment of public and private employers for state wage and hour law purposes (i.e., minimum wage, overtime, meal and rest breaks, exempt status, record-keeping requirements and basic working conditions). As discussed more thoroughly by our colleagues in a recent BB&K Legal Alert, the Dynamex case dramatically changes the test for determining whether workers should be classified as employees or independent contractors under the California Wage Orders and adopts a rule that generally presumes that someone working for a business or organization is an employee and not an independent contractor. However, this new rule only applies for purposes of the California Wage Orders, and does not change the “common-law” test of employment status described in our previous blog.

The application of different rules/tests for different purposes may lead to interesting and awkward legal results. In the case of California public agencies, limited provisions of the California Wage Orders apply. This case may lead some public agencies to re-evaluate their workers’ classification as independent contractors under the Dynamex standard to ensure compliance with the applicable Wage Orders. However, problems (and certainly awkwardness) can arise if that agency has previously taken the position that some of its workers are independent contractors for tax and/or employee benefit purposes. In other words, such an employer could have workers who, for purpose of minimum wages, are treated as employees, and who, for purposes of health and retirement plan benefits, are excluded as independent contractors.

A California public employer might be able to avoid such a dichotomy by “applying” the more generous/inclusive Dynamex rule in its classification of all its workers for all purposes. However, if an employer wishes to simplify things by adopting a single standard, it needs to carefully consider how its workers were classified in the past (and presently), how any changes in classification will apply, and whether and how such changes will affect its employee benefits. For example, if a local agency were to change the classification of workers it had previously treated as independent contractors for tax and employee benefit purposes, what would prevent CalPERS (or a ’37 Act retirement system) from observing the changes and suggesting that such workers were actually “employees” for retirement plan purposes on a fully retroactive basis? As a practical matter, the ability of an employer to treat a worker one day as an independent contractor and as an employee (under the common-law rules) the next day may raise questions of whether the worker was properly classified to begin with.

Because there are potential significant legal and financial impacts associated with the classification and reclassification of your workers, it is important to obtain proper legal advice on all aspects of your past and future decisions in this regard.

Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at jeff.chang@bbklaw.com or (916) 329-3685.

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