In March, the California Court of Appeal in Castellanos v. State of California, issued an opinion that permits app-based driver and delivery businesses to properly classify workers as independent contractors.

The California Legislature’s codification of the holding in Dynamex (“AB5”), established a test to discern between employees and independent contractors. Workers are presumed to be employees with few exceptions. The consequence has been that it is nearly impossible for workers and businesses of any kind to lawfully engage with each other on an independent contractor basis and for businesses to retain independent contractors without incurring the risks of governmental audit and being deemed to have improperly classified workers resulting in significant reimbursements and penalties. Thus, application of AB5 has been the subject of extensive litigation.

In an action brought by the State of California against Uber and Lyft, the State claimed that these businesses violated AB5 by failing to classify their drivers as employees. In response, several app-based companies (including DoorDash and Instacart) asked California voters, in ballot measure Proposition 22, which passed in late 2020, to exempt app-based drivers and delivery businesses from AB5.

Despite Proposition 22, litigation over employee vs. independent contractor classifications continued. Those opposed to Proposition 22 contend that it is unconstitutional because it: (1) limits the State Legislature’s oversight of workers’ compensation for app-based drivers and delivery workers; (2) restricts these workers from collective bargaining; and (3) establishes an unachievable 7/8s majority vote to amend Proposition 22’s collective bargaining terms.

In Castellanos, a group of app-based drivers in California and the Services Employees International Union sought a writ of mandate, claiming Proposition 22 unconstitutionally limits the power of California’s legislature to govern by removing its abilities to grant workers the right to organize and give access to the state’s workers’ compensation program. The presiding California Superior Court judge agreed and ruled that Proposition 22 violates the California Constitution and is unenforceable, because it interferes with the state’s legislative authority and future ability to pass legislation. The Court of Appeal’s reversal of this ruling allows Proposition 22 to stand with the exception of its limitation on lawmakers’ ability to enact legislation that amends Proposition 22, such as allowing gig workers to unionize. On this issue, the Court of Appeal scuttled Proposition 22’s clause that restricts collective bargaining by workers because it invades the legislature and judiciary’s authority.

Although the opinion in Castellanos restores some rights for app-based driver and delivery businesses to classify workers as independent contractors, this is likely not the last word on the issue. The Castellano decision is fully expected to be appealed.

Before you decide to classify workers as employees or independent contractors it is essential that you discuss the matter on a worker-by-worker basis with a qualified California business and employment attorney.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

Someone who “does work for you” of any kind, and is paid for it, is either an employee or an independent contractor.

For many types of work performed in a small firm, the owner would prefer to have the “worker” be treated as an independent contractor.

Why? Because it’s cheaper and easier to manage, with less governmentally-imposed laws, rules and regulations which dictate what kind of relationship can exist between you and your workers.

If a worker is an “employee”, he/she is subject to California’s wage and hour laws, which include dozens of requirements, including overtime pay for anyone who works more than 8 hours in a day or 40 hours in a week. An independent contractor can work 24 hours straight, without even taking time to sleep or rest, and the employer is not required to pay overtime, or to conform to any other wage and hours laws.

Many business owners mistakenly think that if they pay a worker a “salary” instead of an hourly rate, or pay “by the job,” the worker is deemed an independent contractor.

Not so! The bottom line is that your state (or sometimes the feds) will make the decision for you, and decide whether a particular employee (or all employees in a particular job classification) are employees or independent contractors. And if you and the government disagree, whose opinion takes precedence? Obviously, the state.

Of course, you may be one of the “lucky employers” who improperly treats some employees as independent contractors, but operates for years with it never coming to the attention of a government regulatory body. Then the shoe drops: a disgruntled independent contractor is told to get out and never come back … with plenty of justification, or so you think.

Next thing you know, a form comes in the mail from the California Division of Labor Standards Enforcement, advising you that the disgruntled “independent contractor” who formerly worked at your firm has filed a claim against your company, asserting that the worker should have been classified as an employee. The worker now seeks back pay, overtime pay for some of that back pay, and waiting time penalties. The amount you are asked to pay to settle the matter can easily range into the tens of thousands of dollars.

So, the message is clear: don’t classify any workers as “independent contractors” unless you’re 100% sure that’s a legally-correct classification (well, maybe 99% would be okay too, since the risk to you is still very small). If you have any doubt, contact your attorney promptly to learn what information you need make a correct classification.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

Wait a minute: before you sit back and relax, hear this tale of woe. The company involved in this extended and complex matter tried to do it right, but has been embroiled in a legal battle with the state for more than a decade.

Happy Nails operates a chain of nail salons. Fourteen years ago, a consultant helped them set up their business so that the cosmetologists working for them would be treated as independent contractors, rather than as employees. Three years later, California’s Employment Development Department charged Happy Nails for unemployment contributions the company had failed to make (which would not be owed if they were treated as independent contractors).

Happy Nails disputed the assessment. After many years, plus a large chunk of attorney fees, the firm obtained a ruling that the cosmetologists were indeed independent contractors. Happy Nails was “off the hook,” or so they thought.

But those happy feelings didn’t last too long. In 2008, the DLSE entered the scene and assessed penalties against the firm for not giving its employee itemized wage statements. “Wait a minute,” Happy Nails attorney said, referring to the ruling described above. “The state has already determined that the people in question are properly classified as independent contractors.”

DLSE’s response? “We don’t care what that other state agency ruled, we think they are employees.”

Happy Nails requested a hearing, at which it presented the same evidence that years earlier had persuaded the EDD that the workers were contractors. But this time the hearing officer ruled the workers were employees. What did the hearing officer say about the prior contrary ruling from the EDD? Nothing at all.

So it was “off to court.” California Superior Court reviewed the decision and sided with the DLSE. Happy Nails then appealed to the California Courts of Appeal and finally got a favorable ruling. The appellate court told the state that it can’t have it both ways. The appeals court pointed out that “…the same issue had already been litigated between essentially the same parties and that, based on the legal doctrine of collateral estoppel, there was no reason to re-litigate it.”

Overall, good news for businesses. But, it’s still important to understand and comply with the rules for determining when your relationship with Mr. X is truly as an independent contractor, and not as an employee. You should consult with your attorney before making these types of decisions.