CONTRACTORS: DO CALIFORNIA LAWS APPLY TO OUT-OF-STATE WORKERS?

We just wrapped up an SEO project for one of our clients, Patrick Kitchin of Kitchin Legal. We learned a lot during the process of working with him, so we invited him to provide us with a guest post on a topic that is near and dear to our hearts: remote workers. This blog covers work within the US, but the ethics questions at the bottom are essential for all businesses. As a Certified B Corp, we believe that treating workers fairly is central to doing business for good. Read on to find out how laws like AB 5 apply to you.

WORKING WITH INDEPENDENT CONTRACTORS IN CALIFORNIA

Below, we’ll answer all of your questions about working with independent contractors.

DO CALIFORNIA LAWS APPLY TO OUT-OF-STATE INDEPENDENT CONTRACTORS?

Is the classification of an out-of-state worker as an independent contractor governed by California labor laws or by the laws and regulations of the worker’s home state? The short answer is that employment-related laws of each state generally govern the rights of resident workers engaged in work within their home state. When two states’ laws might apply to a worker’s rights, the state with the greatest interest in the outcome of the matter usually governs. The residence of the worker is usually determinative. So, determining whether a worker is an employee or an independent contractor would normally be decided under the laws of the worker’s state of residence if the work is to be performed there.

WHAT LAWS GOVERN THE CLASSIFICATION OF INDEPENDENT CONTRACTORS IN THE U.S.?

Under the U.S. Constitution, each state has the right to control most aspects of the lives of its residents and to establish laws that govern workers’ rights within its borders. The Tenth Amendment to the U.S. Constitution guarantees these rights. Of course, employment anywhere in the United States is subject to a wide range of federal laws that govern workplaces across the country, including for example the federal Fair Labor Standards Act, Title VII of the Civil Rights Act, and the Occupational Safety and Health Act of 1970. If state labor laws do not meet the minimum standards and requirements set out in these and other federal laws, the federal laws govern.

MOST CALIFORNIA-BASED WORKERS ARE EMPLOYEES, NOT INDEPENDENT CONTRACTORS

During the past two years, California has made it easier to determine who is an employee and who is an independent contractor. Assembling Bill 5 (“AB-5”), passed into law in September 2019, codifies into state law the California Supreme Court’s ABC Test set out in its 2018 Dynamex case. The ABC Test challenges the way the gig economy has operated for the past decade. It is now virtually impossible to classify individuals working within California as independent contractors if they perform work that is within the usual course of the hiring entity’s business.

CALIFORNIA IS NOT THE ONLY STATE THAT RELIES ON THE ABC TEST

At least 33 other states have adopted some version of the ABC Test! In each of these states, a similar analytic approach used in California will be applied to determine the nature of the working relationship between two parties. This means that a resident of another state who is improperly classified as an independent contractor working for a California-based company might have the right to sue the California company for damages in their own state’s courts.

WHAT KINDS OF CLAIMS COULD BE BROUGHT BY A MISCLASSIFIED OUT-OF-STATE WORKER?

Like California, all states have passed labor laws that establish employer obligations and employee rights. Those laws differ in significant ways. Overlying those laws, federal employment statutes set a federal minimum wage, mandate certain record-keeping, and establish basic rights that must be afforded workers in every state. Workers’ rights are closely regulated and purposefully biased toward safeguarding the wage and safety rights of employees in every state.

WHAT ARE THE RISKS OF BEING SUED FOR MISCLASSIFICATION?

These are thorny issues for small companies that rely on well-paid workers in other states who want to be treated as independent contractors. Costs associated with employees are significantly higher than those associated with contractors. There are specific financial benefits that flow to the company that relies on independent contractors. Think of worker's compensation insurance, timekeeping and payroll systems, and various work-related business expenses that having remote employees cost. Protections for workers are greater too.

THE TAKEAWAY

Work in the gig economy is raising ethical and legal issues that are redefining the relationship between workers and their employers. From my perspective as an employment attorney, I advise my clients that it is important to evaluate the ethics of the working relationship. The relationship should be fair and equitable. This is not just because it is right, but also because it will make an employment lawsuit less likely to come calling.

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