Independent contractor status at risk as California legislature reviews new rules

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If there aren’t major amendments, California’s legislature is poised to pass a law (AR-5) that will radically restrict individuals whose work would be qualified for “independent contractor” status.

The new law, which has passed the House and is under review in the state’s Senate, will especially and immediately affect truck drivers, many of whom operate their equipment as independent contractors. It will also probably significantly affect thousands of construction workers operating under current independent contractor definitions.

The new rules would set rigid and narrow requirements for independent contractor status through an “ABC” test.

The test, set out by the California Supreme Court (but subject to appeal) says workers can only be classified as independent contractors if they perform their work free from the control and direction of the employer; offer services that are outside the hiring contractor’s normal scope of work; and usually work as part of a business.

California legislators added some exemptions to the rules, for example excluding direct sales salespeople (including Amway agents), real estate licensees, engineers, and architects.

Unscrupulous employers have abused so-called independent contractor status to avoid paying workers fair wages, or provide workers’ compensation or health insurance. Last year, the legislature set out rules that make general contractors responsible for the wages paid to their subcontractors’ employees.

In May, a Chatsworth concrete contractor Universal Structural Building Corp. was fined $598,000 by the California Department of Industrial Relations (DIR) for unpaid wages, wage statement violations, liquidated damages, overtime, and other penalties. The general contractor at one of Universal’s projects was held jointly responsible for almost $69,000 in wages that allegedly Universal failed to pay.

It is likely there will be lobbying to widen the scope of exemptions for the new independent contractor rules, but with the support of organized labor, the trend appears clear that there will be fewer situations where workers can be legitimately classified as “independent” once the legislation passes.

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