Employee or Contractor? What California Nonprofits Should Know

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Businesses and nonprofits in California have been scrambling to understand their obligations toward independent contractors since the state’s Supreme Court delivered its opinion in the Dynamex case last year. In that case, the court adopted a new standard for deciding whether an independent contractor is entitled to the rights afforded to employees. In September the State Assembly codified the Dynamex standards into the state’s Labor Code in Assembly Bill No. 5.

On the one hand, AB 5 clarifies the analysis employers should use to decide whether a worker can lawfully be treated as an independent contractor. On the other hand, it raises many new questions.

The Dynamex standard that AB 5 codifies says that an individual who works for pay is an employee of the hiring organization unless the relationship meets a three part test, called the ABC test:

  1. The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  2. The person performs work that is outside the usual course of the hiring entity’s business.
  3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

AB 5 has a long list of exceptions and caveats to complicate matters. Absent an exception, the challenge for many employers may rest in the third part of the test. Many people who have been working as independent contractors—drivers for ride-sharing businesses like Uber and Lyft have been the focus of media attention around AB 5—do not have an “independent business” apart from the work they do for their hiring organization.

Nonprofits that rely on independent contractors for important elements of their operations should examine their obligations under AB 5 to ensure they are in compliance. An individual’s employment status has many consequences, including taxes, workers’ compensation insurance, and wage protections. For organizations that rely on independent contractors for a lot of what they do, AB 5 may force a radical change in how they operate.

The Church Law Center of California is keeping tabs on how AB 5 may affect its clients. If your organization uses independent contractors and you have questions about how it may be affected by AB 5, we can help. Call us today at (949) 689-0437 or reach out to us through our contact page.

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