Independent Contractor or Employee? How the Dynamex Decision Affects Your Practice

Thanks to a landmark 2018 decision, you may need to take a second look at how you classify your workforce (or how you’re classified yourself).

In the health care industry, hospitals commonly engage clinicians as independent contractors.  Physicians, in particular, often request independent contractor (IC) status for various reasons, such as the flexibility to set their own schedule and to enjoy various tax benefits.  

Worker classification has considerable financial and administrative significance for the hiring organization. If a worker is classified as an employee, the employer becomes responsible for:

  • paying federal Social Security and payroll taxes, 
  • paying unemployment insurance taxes 
  • paying state employment taxes
  • providing worker’s compensation insurance
  • complying with numerous state and federal statutes and regulations governing wages, hours, and working conditions

In contrast, the IC relationship allows the organization more flexibility, less paperwork, less regulatory oversight, lower tax responsibility, and freedom from providing benefits. It can be an attractive arrangement for both parties. The important question, though, is “Is it legal?”

Worker Classification and Employee Protections

The government views classification largely as an issue of worker protections. Sure, a highly skilled physician may benefit from the flexibility of the arrangement, but many lower-wage contract workers find themselves at a disadvantage– performing their jobs to the same expectations as a full-time employee but without benefits, minimum wage guarantees, decent working conditions, and protection against discrimination. In some cases, workers may actively desire to enter an employment agreement, but the organization prefers the flexibility of an IC workforce.

With the growth of the “gig economy,” such workers have started to sue when they believe that they have been misclassified as an IC. The standard for whether a worker is an IC depends upon the context: taxes, workers compensation, employee benefits, and liability all pose potentially different standards. The standard relied upon by many courts involves several different weighted and interrelated factors. While some might argue that this more nuanced approach is necessary to accommodate various industries and situations, it difficult to interpret, hard to apply consistently, and subject to manipulation.

Simplifying Classification: The ABC Test

In April of 2018, the California Supreme Court issued a landmark decision in the case of Dynamex Operations West v. Superior Court, in which the Court all but did away with the complex multi-factor test for determining whether workers should be classified as employees or independent contractors.

The case concerned two delivery drivers who sued Dynamex, a nationwide package and document delivery company, claiming that the company had misclassified its delivery drivers as independent contractors rather than employees. The drivers claimed that Dynamex’s misclassification led to Dynamex’s violation of various labor laws, and, as a result, that Dynamex had engaged in unfair and unlawful business practice.

In addressing the driver’s claims, the court departed from the typical complex test and adopted a simpler approach, called the “ABC” test, to distinguish employees from independent contractors. Under the “ABC” test, an employer has the burden of proving that a worker is an independent contractor rather than an employee, and in order to do so the employer must establish each of the three ABC factors: 

  1. The worker 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 worker performs work that is outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business.

The failure of the employer to establish any one of the three factors results in an automatic determination that the worker is an employee and not an independent contractor.  

​​While the ABC test is ​seemingly ​more straight-forward than the former ​multi-factor test, ​it will likely result in more workers being classified as employees of the hiring company, rather than independent contractors.

Factor “A” of the test combines several of the factors from the previous test, and aims to evaluate whether the employer exhibits control of the worker’s performance of the work, including whether the worker supplies his own tools or controls the details of his work.

Factor “B” looks at whether the worker can reasonably be viewed as providing services similar to that of the organization, or as providing services that are outside the usual course of the hiring organization’s business. To illustrate the meaning of the “usual course of business,” the Court gave the example of a grocery store that hires a plumber to perform maintenance at its place of business whereby such services could not reasonably be considered part of the store’s usual course of business. In other words, the store sells merchandise, not plumbing services.

“On the other hand,” the Court said, “when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company,” the workers are part of the employer’s usual business operation and are likely employees and not independent contractors.

Factor “C” of the ABC test, considers whether the worker has taken steps to create their own independent business, such as: creating an LLC or corporation, obtaining licensure, advertising their services, or routinely offering their services to the public or a number of potential customers.

Although the ABC test seems simpler, the court has compressed many of the previous factors. And again, this ruling may only apply to the narrow context of the labor code which was in dispute. However, it is expected to have far-reaching effects as other courts and legislatures seek to implement its standard.

Worker Classification in the Healthcare Industry

The Court’s decision in Dynamex may have a significant effect on the health care industry. The court showed its willingness to weigh the public interest in social welfare and protection of workers over the preferences and personal interests of workers and employers. Indeed, many workers in the health care industry prefer to maintain their status as independent contractors, including physicians.

When physicians or employers want to establish that a physician working for them is an independent contractor and not an employee, factor B will likely be the hardest to prove. Factor B would ask whether the physician performs work that is outside the usual course of the hospital’s business. Obviously, hospitals provide medical services, which are rendered by physicians — if the physician provides such services on the hospital’s behalf, factor B will be hard to prove.

The same concern exists for other members of the healthcare industry, especially those who render services through telehealth, as new mHealth technologies have become increasingly integrated into hospitals’ or medical practices’ operations.

The California legislature is working to integrate the Dynamex ABC test into the State’s labor code. However, the proposed law would specifically exclude physicians and surgeons providing certain services, but it does not appear to make the same allowances for other types of health care professionals. If the bill passes, it would go into effect on January 1, 2020.

At this time, it would be wise for employers to evaluate their independent contractor relationships with legal counsel to ensure that they are properly classified in order to avoid liability in the future.

The Next Step for Your Employment Relationships

It’s unclear as to whether the test applies in other contexts. The harbinger of the State attempting to put it into law and exclude specific health care professionals suggests that its application is broad. When California acts with regard to labor law matters, other states tend to follow suit. Thus, regardless of whether you live or conduct business in the state, this decision bears noticing. It’s also important to consider its implications for your practice’s California-based workers, who may now be considered to be improperly classified as independent contractors.

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