A decision by the California Supreme Court this past year has created significant uncertainty in California about whom employers can legitimately classify as an “independent contractor” and whom they must treat as an employee. The ramifications of this decision for people in the property management industry – while still largely up in the air – can be seismic. At a minimum, it should cause everyone involved in property management to reexamine whether its “independent contractors” truly are, and the consequences of guessing wrong on this critical subject.
The case of which I speak is Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal. 5th 903, in which the court enunciated the deceptively simple-sounding “ABC test” to determine whether, for the purpose of wage and hour laws, a worker qualifies as an employee or independent contractor. This decision impacts, among other things, minimum wage issues, overtime, and meal and rest break requirements. Misclassifying an employee as an independent contractor can create significant exposure for an employer – not to mention expose it to costly lawsuits.
The “ABC” Test
The “ABC” test goes as follows: First, we start with a presumption that a worker is an employee, not an independent contractor. Anyone classifying a worker as an independent contractor bears the burden of justifying this classification.
To establish a worker as an independent contractor, you must prove all of the following:
(A) The worker is free from the hiring entity’s control and direction in connection with the performance of the work, both under the governing contract and in fact;
(B) The worker performs work that is outside the usual course of the hiring entity’s business; and
(C) The worker customarily is engaged in an independently established trade, occupation, or business of the same nature as the work performed.
I will focus on part “B” of this ABC test because it raises a fundamental as-yet-unanswered question for those in property management: what, exactly, constitutes “work that is outside the usual course of” the property management business? Ask three people, and you likely will receive four answers.
The Dynamex court offered the following only-partially-helpful illustrations of when a worker is performing work “outside the usual course of the hiring entity’s business:”
[W]hen a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store’s usual course of business and the store would not reasonably be seen as having suffered or permitted the plumber or electrician to provide services to it as an employee. On the other hand, 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, or when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes … the workers are part of the hiring entity’s usual business operation and the hiring business can reasonably be viewed as having suffered or permitted the workers to provide services as employees. In the latter settings, the workers’ role within the hiring entity’s usual business operations is more like that of an employee than that of an independent contractor.”
This is all well and good, but how does it apply to the business of property management?
Another recent court decision explained that Part B, in essence, examines whether the worker can reasonably be viewed as working in the hiring entity’s business – a question that turns on whether he or she is “reasonably viewed as providing services to the business in a role comparable to that of an employee, rather than in a role comparable to that of a traditional independent contractor.” To me, this seems circular and offers little guidance.
Because the ABC test is so new in California, it remains unclear what a court would consider work that is “part of the … usual business operation” of a property management business. Does the “usual business operation” of property management include cleaning units? Maintenance work? Because of this uncertainty, someone employing these types of workers must examine the situation carefully to avoid misclassifying them. I briefly examine each below.
If you employ someone to regularly clean and maintain the common areas of different properties – and particularly if you are not hiring a business that regularly performs such services for you and others – you run a significant risk that a court will find that worker to be an employee, i.e., that the work being performed does not fall “outside the usual course of the hiring entity’s business.” This would be especially true if you pay that person hourly.
Are handymen who routinely perform work for a property management company performing work “outside the usual course of the hiring entity’s business?” Because fixing up rental properties certainly might be considered part of a property management company’s “usual business operation,” a court might find the handymen fail Part B of the ABC test. The likelihood of a court finding the handymen to be employees, rather than independent contractors, is enhanced to the extent that, unlike the plumber in the court’s example, the handymen work for you on a regular and ongoing basis, are paid by the hour, and do not operate a separate trade or business. On this last point, one court has explained that an entity must show the worker actually is “customarily engaged in an independently established trade, occupation, or business” apart from his work for the entity, not merely that he is capable of doing so.
As an aside, keep in mind that to the extent a handyman performs work for which a contractor’s license is needed, there exists a “rebuttable presumption” that he is your employee, rather than an independent contractor. You usually can rebut this presumption — in other words, show he really is an independent contractor — by demonstrating he has the right to control his own work and discretion how to do it, that he has his own independently established business, and various other factors that tend to evidence independent contractor status, such as he was hired for a particular job, has his own tools, etc. However, if your worker needs, but does not possess, a license, you cannot rebut the presumption that worker is your employee, i.e., he becomes your statutory employee.
The potential risk in misclassifying employees as independent contractors is significant. Among other things, doing so creates potential liability with respect to claims of unpaid overtime, minimum wage, meal and rest break and record keeping violations – all of which may extend back several years. Therefore, given the lack of clarity at this point in time, the safer course often will be to reclassify as employees the classes of individuals discussed above. Of course, you should talk to a lawyer about the ramifications of doing so.
Gary Ganchrow is a shareholder at Parker Milliken Clark O’Hara and Samuelian. He regularly advises on, litigates and writes about a variety of employment, property management, and business matters, and has been a contributor to AOA magazine. He can be reached at (213) 683-6535 and [email protected]. This article is for informational purposes only, and should not be considered legal advice or establishing an attorney-client relationship.