Is the Gig Up? Recent Developments in Worker Classification Law

October 19, 2018

There are myriad different tests on how to classify workers. Depending on the location of your business and workers, it may be easier to classify them as employees rather than independent contractors.

Gig Economy, Platform Companies Are Here to Stay

The trend toward a gig economy has undoubtedly begun. A study by Intuit predicted that by 2020, 40 percent of American workers would be independent contractors (or at least classified as such). In a gig economy, temporary positions are common, and organizations contract with independent workers for short-term engagements. It would seem that younger workers want employment mobility, not long-term careers. In platform-style companies (i.e., businesses built around matchmaking between vendors and customers), many employers want the flexibility and cost savings of using independent contractors rather than employees. Platform companies provide everything from room rentals (Airbnb) to used clothing (thredUP), with Uber’s car service being the most recognizable example.

From an employer’s perspective, it’s important to ensure that you have properly classified your workers. Most of you already know that there are many different tests to determine whether a worker is an employee or an independent contractor. The IRS has a test. State departments of workforce development have tests. Worker’s compensation divisions have tests. There are even tests related to unemployment.

Some states, such as Florida, Indiana, Kentucky, and Utah, have legislated tests that arguably make it easier for so-called platform companies to keep classifying workers as independent contractors. Additionally, in June 2017, the U.S. Department of Labor (DOL) withdrew its earlier administrative interpretation that had taken the position that “most workers” were employees.

ABC Test Reduces Uncertainty, Yields More Employees

Recently, however, the California Supreme Court upheld yet another test in worker misclassification cases. The court adopted the “ABC test” to differentiate between independent contractors and employees. The test has not been adopted in Wisconsin but has been used in Massachusetts and other places. Moreover, it encompasses some of the same legal principles that are in place in Wisconsin.

In general terms, the ABC test is shorter and ostensibly more certain. Like Wisconsin’s worker’s compensation and unemployment statutes, it presumes that workers are employees and finds independent contractor status only if all three of the following requirements are met:

  1. The individual is “free from direction and control,” both “under his contract for the performance of service and in fact.”
  2. The service is performed outside the employer’s usual course of business; and
  3. The individual is “customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.”

Rather than the traditional approach of considering the totality of the circumstances guided by a set of factors, the ABC test presumes employee status and establishes the three requirements that must all be met to rebut the presumption. By doing so, the test aims to decrease uncertainty.

Beyond simplifying the requirements and reducing uncertainty, the ABC test makes it much easier to find an employee relationship. Consequently, employers are much more likely to have legal and tax responsibilities for their employees in states that use the test. The impact includes greater protections for employees and significant costs for employers.

Growing Number of States on Board with ABC Test

States began using the ABC test around 2004, and more have been adopting it ever since. While it was a court that adopted the test in California in Dynamex Operations W. v. Superior Court, most of the time it has been approved by state legislatures (Delaware, Illinois, Kansas, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Utah, and Washington). In the last few years, the law has become popular enough that courts have started to adopt the ABC test independently. The California court adopted the test without any action by the state legislature. The New Jersey Supreme Court adopted the ABC test for worker classification in wage and hour claims after the state legislature had instituted it for unemployment compensation laws.

Bottom Line

The number of states adopting the ABC test may continue to grow, especially since it can be instituted by either courts or legislatures. While Wisconsin doesn’t use the test, it may in the future. The state’s worker’s comp and unemployment compensation programs already create a presumption of employee status, so adopting the ABC test would not be a radical step away from current law. Its adoption, however, would have a huge impact on Wisconsin employers.

As it stands, states have been making the independent contractor classification more difficult to establish, and although Wisconsin hasn’t acted yet, you should be aware of the trend. If the Wisconsin Legislature or supreme court adopts the ABC test, many independent contractors could be reclassified as employees. When gig workers and others share aspects of both employees and independent contractors, the presumption for employee status will often come out on top.

The ABC test continues to analyze the relationship based on the employer’s right to control and “economic realities,” but it shifts the presumptive weight strongly in favor of employee status. If you currently use independent contractors, you may need to make changes to your written agreements to ensure compliance with this ever-changing area of the law.

This article, slightly modified to note recent updates, was featured in the September 2018 issue of the Wisconsin Employment Law Letter, which is co-edited by Axley Brynelson Attorneys Saul Glazer and Michael Modl and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.