California Supreme Court Restricts Use of Independent Contractors

Landmark Case on Independent Contractors in California

In a ruling with important consequences for yoga studios in California, the California Supreme Court on Monday made it much more difficult for studios to classify their teachers as independent contractors rather than as employees.

The case was Dynamex Operations West, Inc., v. The Superior Court of Los Angeles, California.  In its opinion, the Court initially observed that classification of a worker has important consequences.

If the worker is an employee, then the business has the responsibility of paying Social Security and payroll taxes, unemployment insurance  taxes, employment taxes and worker’s compensation insurance.  In addition, the business must meet requirements concerning minimum wages, hours, working conditions, and various employment protections.

However, if the worker is an independent contractor, then the business does not have to bear any of those obligations.

From a policy perspective, those businesses who have independent contractors have an economic advantage over those businesses who have employees because they do not have to pay taxes or follow the employment laws. Workers do not have the legal protections that employees have. Last, independent contractors deprive the government of billions of dollars of tax revenues.

In this case, the workers sued Dynamex which is a package delivery service and alleged that they were misclassified as independent contractors rather than as employees.  The court held that the drivers were employees rather than independent contractors.

What is the ABC test?

The court rejected the existing test in California which (which used ten factors to determine status) and adopted the most restrictive test for classifying workers: the ABC test.  Here is the ABC test:

The ABC test presumes that all workers are employees and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions: (a) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and (b) that the worker performs work that is outside the usual course of the hiring entity’s business; and (c) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Importantly, workers are now presumed to be employees and it is up to the business to prove that workers are independent contractors if they can meet the ABC test.

Under the ABC test, the worker is considered an employee if he or she performs a job that is part of the “usual course” of the company’s business. As an example, the court said a plumber hired by a store to fix a bathroom leak is not an employee of that store. The plumber is not in the same business as the store. However, seamstresses sewing at home using materials provided by a clothing manufacturer are employees.

In the same way, a yoga teacher is in the same business as the yoga studio. The yoga studio provides the teacher with the “tools” (yoga mats, props, music system, etc.) to teach the classes. Yoga studios typically assert a large degree of control over the details of the way that teachers teach their classes.  The teachers teach the classes at the yoga studio.

What does this mean for yoga studios in California?

It means that the yoga teachers who teach in your studio are presumed to be employees. Yoga studios now have to meet the restrictive ABC test. Teachers are  independent contractors only if (a) you do not control or direct how they teach their classes, (b) if teaching yoga is outside of your yoga business, and (c) the teacher has an independent business that is the same as they work they do for you.

This is a very difficult burden for yoga studios to carry.

Assuming that you do not control your teachers and that they are running a bona fide yoga teaching business, it would be very difficult to show that your teacher’s business is different from your yoga studio business. Your case would be weaker than the seamstress example mentioned by the Court because the seamstress is sewing in your factory! This is especially true for those teachers who only teach at your studio. How can you say they are running an independent business that is separate than your business?

If you hire a workshop presenter who does not teach regular classes at your studio, you can make a good case that the presenter is an independent contractor.

The EDD has been targeting yoga studios for audits over the past several years, so yoga studios are no longer “flying under the radar” with regard to proper classification of yoga teachers. If you are audited, your chance of winning the audit has been dramatically reduced.

What Should You Do?

If you are in the process of launching a new yoga studio, I strongly recommend that you treat your teachers as employees. That way you will not need to worry about an audit; you are already in compliance with the tax laws.

If you are currently classifying your teachers as independent contractors, you should consider re-classifying your teachers as employees. Although this will not extinguish any liabilities you may have incurred due to improperly classifying your teachers in the past, you will have at least show a good faith attempt to follow the law and you will not be accruing any tax liabilities in the future.

Resources

Light on Law-A guide to independent contractors and employees for yoga studios and wellness businesses

Model Employee Handbook

Light on Law Newsletter