Bye-bye, 1099 Workers

As you’ll recall, Charles Lee, the guy who worked for Dynamex for fifteen days (yes, just 15 days), set the employment world on its head. Because of his lawsuit, it suddenly became much more difficult in California to justify classifying a worker as an independent contractor.

Under the new Dynamex standard, a company will have a heavy burden to disprove employment. Merely asserting a lack of control by the business will fail.

Instead, the company must establish “(a) that the worker is free from control and direction over performance of the work, both under the contract and in fact; (b) the work provided is outside the usual course of the business for which the work is performed; and (c) the worker is customarily engaged in an independently established trade, occupation or business. If the hirer fails to show that the worker satisfies each of the three criteria, the worker is treated as an employee, not an independent contractor.”

Still reeling from this, California employers were stunned to learn that this Dynamex or “ABC” test likely will be applied retroactively.

In other words, consider the company that for years has been relying on the old test to determine whether a worker was an employee or an independent contractor. Remember that test? The old standard tried to measure how much control a company exerted over its workers to determine which status applied. This test had been used and confirmed by courts for decades.

Now, under the ABC test, it’s not so much about control. Rather, unless the work provided is outside of the normal business of the company (such as a pizza shop hiring someone to paint the store’s exterior), there is an excellent chance the worker will be treated as an employee.

So, if a worker now challenges that he should be an employee and not an independent contractor, the ABC test will probably be used even though the business relied on the old, court-approved test of control. Stated another way, the ABC test will likely apply retroactively.

Why the hedging words such as “probably” and “likely”? Because it was a case (Vazquez v. Jan-Pro Franchising International, Inc.) from the Ninth Circuit Court of Appeals, a federal court rather than a California state court, which ruled two months ago that the ABC test applies retroactively. And, while decisions from federal courts can be persuasive as they decide state law issues, their final rulings do not bind the state courts. But federal persuasion will likely win the day.

To add insult to injury, on May 29, the state Assembly passed AB5, the codification of the Dynamex decision. The state Senate has begun the process of considering and ultimately voting on AB5.

According to the Legislative Analyst:

“The bill would provide that the factors of the “ABC” test be applied in order to determine the status of a worker as an employee or independent contractor for all provisions of the Labor Code and the Unemployment Insurance Code, except if a statutory exemption from employment status or from a particular obligation related to employment or where a statutory grant of employment status or a particular right related to employment applies. The bill would exempt specified professions from these provisions and instead provide that the employment relationship test for those professions shall be governed by the test adopted in S.G. Borello & Sons Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, if certain requirements are met. These exempt professions would include, among others, licensed insurance agents, certain licensed health care professionals, registered securities broker-dealers or investment advisers, direct salespersons, real estate licensees, workers providing hairstyling or barbering services, … licensed repossession agencies who meet requirements, and those performing work under a contract for professional services, with another business entity, or pursuant to a subcontract in the construction industry.”

Reportedly, Uber, Lyft and others of the “gig economy” are furiously trying to convince the state Legislature to include them in the list of exempted businesses or professions. As of this writing, those efforts have failed.

So, if AB5 becomes law, except for a few exceptions, the ABC test will be the litmus test for determining if a worker is an employee or an independent contractor. That may take the air out of Uber’s uber value of $100 billion. Stay tuned. ©

He was skeptical about the need to pay an attorney to review the document. So, I challenged him with eight issues he had not considered. Here they are in more detail.

First, were there any renewal periods? There were, but he really didn’t know the specifics. So, we examined the lease and learned a few things. There was one option to renew. It was silent as to what the renewal rate would be other than to say, “Market Rate.” So, if Jim had a smoking rate now, the landlord could make some of that money back, because the current lease would be below market. I recommended he ask for a definite amount or at least a predetermined percentage of increase rather than the vague “Market Rate.”

Then we talked about the landlord’s reserved right to force him to move. This was shocking news to Jim. “You mean my landlord could force me to move to a completely new location at his whim?” I confirmed that the landlord had that right under the lease. And while the landlord might help pick up the costs of the move, he most definitely would not pay Jim for any lost profits. That concept sucked.

I asked Jim if he was going to get any tenant improvement (or TI) allowance for the work he had to do on the new space. No, he didn’t even know he could ask for it.

Speaking of TI work, did Jim have any concept about how long the work was going to take? Did he have a general contractor inspect the location and give him an estimate of the cost? Was his anticipated use of the premises even permitted under the current zoning laws? Did he know if there was adequate parking? I strongly advised Jim to have those questions answered before he signed the lease. Because if he signed and then learned there were problems with the use, or that the TI work was going to take several months, it was too late to back out of the lease.

An obvious question was: When did he have to start paying the rent? Was it when he signed the lease? Or did the landlord give him a few weeks to finish his TI work before sending invoices for rent? What happens if the TI work takes much longer than anticipated? Will he be in a position where he’s paying rent before he’s even open for business?

Did he get an agreement that no other traffic schools would be allowed in the shopping center? In other words, did the landlord grant him an “exclusive use” right? And how exclusive is that right? Does it prohibit all traffic schools or just “comedy” ones? How about a driver’s training business? Would that violate the exclusivity clause? Did the exclusivity apply to tenants already in the shopping center? And what were the consequences if the landlord screwed up and rented to another school? Could Jim force the landlord to disown the new lease, or did Jim just receive some payment for his damages?

I alerted Jim that he was going to have give a personal guarantee. That meant the landlord could sue Jim personally if his new business ever fails. So, all of Jim’s personal assets were at risk for the full term of the lease, as well as any extension.

We then started talking about CAM charges, which will be the subject of the next column. ©

Related Posts
  • 2021 and New Covid-19 Regulations for Employers Read More
  • The ABCs, So to Speak, of Dynamex: AB 5 Read More
  • Brave New World for Employers Read More