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The Legal Department articles are not intended to serve as legal advice and are offered for educational purposes only. The information provided should not be used as a substitute for independent legal advice and it is not intended to address every situation that could potentially arise. Please be aware that laws, regulations and technical standards change over time. As a result, it is important to verify and update any reference or information that is provided in the article.
This article discusses the topic of independent contractors, including relevant legal factors to consider regarding their use. Consideration is given to a recent California Supreme Court decision concerning the classification of independent contractors.
Michael Griffin, JD, LCSW
Most therapists are not going to be terribly interested in the topic of this article. That’s understandable, because determining whether an individual should be classified as an independent contractor or an employee is pretty dry subject matter compared to psychotherapy. But, anyone who is contemplating hiring an individual as an independent contractor should be aware of the fact that this subject is of great interest to numerous federal and state agencies, such as the Internal Revenue Service, the Franchise Tax Board, the Employment Development Department (EDD), and the Division of Labor Standards Enforcement (DLSE),1 2 If a governmental agency determined that a business improperly classified a worker as an independent contractor, rather than as an employee, the business in question could face serious financial consequences, such as a bill for unpaid federal and state taxes, fines, penalties and legal costs.3 4 This article should be of interest, therefore, to individuals with hiring responsibilities, such as therapists in private practice, and agency administrators.
Employers ordinarily look to the interpretations of the courts and governmental agencies to determine whether, in a particular circumstance, a worker should be considered an employee or independent contractor. In making such a determination, the DLSE starts with the presumption that the worker is an employee.5 This is a rebuttable presumption, however, and a business could contend, in a given circumstance, that the classification of a worker as an independent contractor was appropriate. But an employer must understand that it may be necessary to defend such a decision if challenged by a regulatory agency.
So, how does one distinguish an “employee” from an “independent contractor?” Unfortunately, there is no simple answer to that question. To begin, there is no universally accepted definition for “independent contractor,” and federal and state authorities have historically applied their own approaches to making such a determination. Furthermore, because there are countless circumstances which involve the hiring of workers, no single method or formula exists for determining whether a worker may be hired as an independent contractor in every situation. And, if this weren’t enough, a recent decision by the California Supreme Court has basically turned this entire topic on its head. (We’ll get to that in a moment).
Governmental agencies often utilize similar approaches to the classification of workers, but there are a variety of classification schemes in use. For example, according to the United States Department of Labor, a worker is an employee under the Fair Labor Standards Act, where, as a matter of “economic reality,” the individual is dependent on the business which he or she serves, rather than someone who is in business for him or herself.6 By comparison, the Internal Revenue Service (IRS) considers multiple factors to determine whether there is sufficient control over the worker to establish an employer-employee relationship.7 According to the IRS, the importance of any single factor depends upon the occupation of the worker and the particular facts and circumstances.8 9
Since 1989, the main test in California for determining whether a worker should be classified as an independent contractor, or an employee has been a multi-factor balancing test adopted by the California Supreme Court in the case S.G. Borello & Sons, Inc. v Dept. of Industrial Relations.10 Often referred to as the “Borello test,” this approach primarily considers whether a hiring entity has a “right to control” the manner in which an individual performs the services being rendered, along with several other secondary factors, such as: Whether the worker is engaged in a distinct occupation or business; the skill required to perform the work in question; the place where the work is to be performed; the length of time that the services are to be performed, and whether the work is part of the regular business of the employer. The question as to whether or not the parties believed that they were creating a relationship as employee-employer, is also a relevant consideration, but it is not determinative.11
The Dynamex Case
Earlier this year, in the case, Dynamex Operations West, Inc., v. Superior Court of Los Angeles County, the California Supreme Court issued a potentially game-changing opinion concerning this entire topic.12 The dispute in this case concerned the classification of delivery drivers in order to determine whether California’s Industrial Welfare Commission (IWC) “Wage Orders” applied to their labor.13 Wage Orders impose obligations on employers concerning the treatment of employees in various industries involving issues such as minimum wages, maximum hours and working conditions. The delivery drivers alleged that Dynamex misclassified them as independent contractors rather than employees, and that they should have been subject to the Wage Orders applicable to employees in the transportation industry.14 As independent contractors, the drivers were required to provide their own vehicles and to pay for their transportation expenses, such as fuel, vehicle maintenance, and liability insurance, and did not have other benefits that would ordinarily be provided to employees, such as workers compensation insurance and employer contributions to their taxes.15
The “ABC” Test
In the Dynamex case, the Court decided that is was appropriate for employers to utilize a standard known as the “ABC test,” instead of the multi-factor Borello test, to determine whether the delivery drivers should be classified as independent contractors, or employees subject to California’s Wage Orders.16 This was a departure from precedent, to put it mildly. The bare-bones simplicity of the ABC test is dramatically different from the Borello test, or from any of the other “multi-factor” tests that would ordinarily be applied to these issues.
Under the ABC test, a worker is presumptively considered to be an employee, and may only be considered an independent contractor if the employer establishes all three of the following factors:17
Seek Appropriate Consultation
While it is common for therapists to hire other therapists as independent contractors, it is not a simple issue and therapists must be cognizant of the classification rules which are utilized by federal and state regulatory agencies. As of April 2018, there is the additional need for consideration of the ABC test as expressed by the California Supreme Court in the recent Dynamex case.
Although, strictly speaking, in the Dynamex case, the Court adopted a new rule for the purpose of interpreting California’s IWC Wage Orders, their decision has far-reaching implications. If interpreted more broadly by the courts, the ABC test could apply to employment generally, including the classification of all workers. At the very least, it would be a risky proposition for any employer to assume that the ABC test would not be applicable to his or her circumstances.
Ultimately, no matter how familiar one may be with this content, it is strongly recommended that prospective employers seek the advice of a qualified legal professional regarding the classification of any worker as an independent contractor. While there is ordinarily a cost associated with obtaining such advice, it may prove to be a good investment if it helps to avoid a much more costly mistake.
It is possible to make a few fundamental observations regarding the ABC test:18
While all of the requirements stated in the ABC test are important, the requirement in Prong “B” may be the most difficult for many businesses, including psychotherapy practices, to overcome. For example, based on this requirement, a psychotherapy practice would be unable to hire a therapist as an independent contractor unless he or she was performing work that is outside the usual business of the hiring entity. This will obviously be difficult to accomplish if the psychotherapy practice, and the independent contractor, are providing the same psychotherapy services.
In spite of such limitations, it does not mean that it is impossible for a therapy business to hire someone as an independent contractor. The decision to hire an individual as an independent contractor, or as an employee, will likely depend on many factors, including, but not limited to, the specific duties of the worker in question, and how “the usual business of the hiring entity” is defined.
Consider the following examples: (Assuming that Prong A and C are met)
In the first two examples, it could be argued that the individuals hired to perform services as an independent contractor are providing services that are “outside the usual business of the hiring entity.” But what about the third scenario? This is where Prong B of the ABC test creates a gray area that could be argued either way. Therapists who are faced with similar situations should consult with a labor law attorney.
Michael Griffin, JD, LCSW, is a staff attorney at CAMFT. Michael is available to answer member calls regarding legal, ethical, and licensure issues.
1 The Internal Revenue Service and Franchise Tax Board are concerned with issues involving federal and state taxation, respectively. The Employment Development Department, (EDD) is concerned with employment-related taxes. The Division of Labor Standards Enforcement, (DLSE) is concerned with the application of wage, hour and workers compensation insurance laws. This is not intended to serve as an exhaustive list of governmental agencies that are interested in this subject matter.
2 “Independent Contractor Versus Employee,” State of Calif., Dept. of Industrial Relations, https://www.dir.ca.gov/dlse/faq independentcontractor.htm
3 See, Jensen, David, G., JD, “Thoughts on Classifying Marriage & Family Therapists as Independent Contractors,” The Therapist, Nov/Dec, 2004.
4 See, Jensen, David, G., JD, “Towards a Model Independent Contractor Agreement for the Rendering of Professional Services,” The Therapist, Jan/Feb, 2005.
5 Calif. Labor Code, Section 3357.
6 Fact Sheet 13: “Employment Relationship Under the Fair Labor Standards,” Act, US Dept. of Labor, Wage and Hour Division, https://www.dol.gov/whd/regs/compliance/whdfs13.htm; Fact Sheet 22: “Hours Worked Under the Fair Labor Standards Act (FLSA),” https://www.dol.gov/whd/regs/compliance/whdfs22.htm
7 IRS Information Sheet: Independent Contractor or Employee? https://www.irs.gov/businesses/small-businesses-self-employed/ independent-contractor-self-employed-or-employees
9 See, Jensen, David, G., JD, “Thoughts on Classifying Marriage & Family Therapists as Independent Contractors,” Supra.
10 S.G. Borello & Sons Inc. v. Department of Indus. Relations, (1989) 48 C3d 341
12 Dynamex Operations West, Inc., v. Superior Court of Los Angeles County, Charles Lee, et al, 4 Cal. 5th, 903, April 2018.
13 State of Calif., Dept. of Industrial Relations, IWC Wage Orders, https://www.dir.ca.gov/iwc/wageorderindustries.htm
14 Dynamex, Supra.
18 Subsections A, B and C are referred to here as “prongs” A, B, and C for the sake of convenience. This writing is not intended to serve as legal advice, nor is it a substitute for consultation with a qualified attorney on these matters.
This article is not intended to serve as legal advice and is offered for educational purposes only. The information provided should not be used as a substitute for independent legal advice and it is not intended to address every situation that could potentially arise. Please be aware that laws, regulations and technical standards change over time. As a result, it is important to verify and update any reference or information that is provided in this article.