Employee or Independent Contractor?

California and San Francisco ballot measures raise important worker classification issues

From JDSupra, Eversheds Sutherland (US) LLP discuss two ballot measures – Proposition 22 which applies to all of California and Proposition L which only applies to San Francisco – and their relationship to how workers are classified. 

Last week, California voters passed several ballot measures impacting businesses on both the state and local levels. Of note are California’s Proposition 22 – which considers app-based drivers for rideshare and delivery companies to be independent contractors – and San Francisco’s Proposition L – which imposes an additional tax on businesses where compensation for executives significantly exceeds the median compensation of San Francisco employees.

These ballot measures could have substantial financial impacts on employers with workers in the Golden State. The measures also raise important questions that businesses should consider regarding the classification of their workers as employees or independent contractors for purposes of applying San Francisco’s new CEO Tax under Proposition L.

Proposition 22 and AB 5

Proposition 22 appears to have succeeded at the polls with 58.5 percent of the vote and establishing new criteria for determining whether app-based drivers of delivery and rideshare companies (i.e., network companies) are employees or independent contractors under California law. Proposition 22 was a response from a number of gig economy companies including Uber, Lyft, Postmates, Instacart, and DoorDash after the passage of Assembly Bill 5 (AB 5).

AB 5 codified an earlier California Supreme Court decision1  that presumes a worker is an employee, rather than an independent contractor, unless the hiring entity satisfies a three-factor test (i.e., the ABC test). Under the ABC test, workers are only independent contractors if they are free from the direct control of the company they work for, perform work “outside the usual course” of the company’s business, and perform the same kind of work for other companies.

If a hiring entity cannot satisfy the three-part ABC test, California law classifies the worker as an employee, and the provision of the Unemployment Insurance Code (which governs, among other things, withholding tax on wages and unemployment and disability compensation), the wage orders of the Industrial Welfare Commission (which governs, among other things, minimum wage payment, overtime pay, meal and rest breaks), and the Labor Code (which requires, among other things, reimbursement of necessary business expenses and payment of workers compensation benefits) apply.

While AB 5 generally applies the three-part ABC test for determining a worker’s classification, the law provides over fifty specific carve-outs and establishes different standards and tests for certain professions, occupations, and industries.2

Proposition 22 also provides a carve-out from AB 5 for app-based rideshare and delivery drivers. The measure clarifies that app-based drivers are independent contractors rather than employees if certain conditions are met, and requires network companies to provide some benefits to app-based drivers who are classified as independent contractors, including minimum hourly earnings guarantees, healthcare stipends, and occupational and accident insurance.

Proposition L

At the local level, San Francisco voters passed Proposition L, otherwise known as the “CEO Tax”, with 65 percent support. Proposition L amends the City’s Business and Tax Regulations Code to impose an additional gross receipts tax (between 0.1% – 0.6% of gross receipts) or an administrative office tax (between 0.4% to 2.4% of payroll) on businesses when the highest-paid managerial employee earns more than 100 times the median compensation paid to the business’s employees based in San Francisco. The ratio between the compensation paid to the highest-paid managerial employee and the median compensation paid to San Francisco-based employees is known as the “executive pay ratio”.

An employee is considered based in San Francisco for a tax year if the employee’s total working hours in San Francisco for the employer or the combined group during the tax year “exceeds the employee’s total working hours in any other local jurisdiction” for the employer or the combined group during the tax year. The surtax will be imposed beginning January 1, 2022.

Eversheds Sutherland Observation: Both California’s Proposition 22 and San Francisco’s Proposition L highlight how important it continues to be for businesses to properly classify their workers as employees or independent contractors. Even further, it is equally important for businesses to understand that a worker intended to be an independent contractor needs not only to meet the requirements to be an independent contractor at the state level, applying the three-part “ABC test” under AB 5 or alternative tests prescribed under California law, but also at local levels where cities may apply different standards.

For example, the San Francisco Business Tax and Regulations Code defines an employee as “any individual in the service of an employer, under an appointment or contract of hire or apprenticeship, express or implied, oral or written, whether lawfully or unlawfully employed.”3 Unlike certain areas of the City’s Labor Laws, San Francisco has yet to incorporate the provisions of the California Labor Code, which were added last year by AB 5 that expanded the classification of “employee” as noted above, into the Business Tax and Regulations Code.

This distinction is especially important in the context of Proposition L, where a worker’s classification in San Francisco will directly affect the calculation of a business’ executive pay ratio. Because the surtax in Proposition L is calculated using compensation paid to employees based in San Francisco, the tax would not be triggered if a business does not have any employees based in San Francisco (e.g., no workers at all or only independent contractors employed in the City). Thus, the imposition of Proposition L’s surtax may hinge on whether a worker is classified as an independent contractor or an employee. As California historically has been aggressive at asserting that workers classified by businesses as independent contractors should instead be classified as employees, businesses should be acutely aware of worker classification for purposes of calculating the new CEO Tax under Proposition L.

 

1.Dynamex Operations West, Inc. v. Superior Court of Los Angeles, 4 Cal.5th 903 (Cal. Sup. Ct. Apr. 30, 2018).
2.See also Cal. AB 2257 (2020), which provides additional carve-outs from the ABC test adopted by AB 5.
3.San Francisco Business and Regulations Code section 6.2-9

Source: California and San Francisco ballot measures raise important worker classification issues | Eversheds Sutherland (US) LLP – JDSupra

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