The Quandary of the ABC Test: What Does Employee Classification Mean for Your Business?

The rise of the gig economy has raised the profile of the employment law topic. Companies in the gig economy rely on classifying workers as independent contractors, even if those workers choose to work full-time. With the recent Dynamex Operations West Inc. v. Superior Court of Los Angeles decision, the debate around worker classification is heating up even more.

The Dynamex decision changed the “test” for determining whether a California worker is an employee or independent contractor (to the “ABC” test) for wage purposes only (i.e., employer obligations related to minimum wages, maximum hours, and certain other basic working conditions like meal and rest breaks). So, on its face, the opinion does not extend to other costs like expense reimbursements. However, the practical implications for California businesses trying to comply with the decision often extend beyond wages.

California Legal Landscape

While the federal Fair Labor Standards Act (FLSA) focuses on wage issues, such as requiring employers to pay their employees minimum wage, California’s Labor Code section 2802 additionally requires employers to reimburse their employees for business-related expenses. All California employees – no matter their compensation – are entitled to reimbursement for the reasonably necessary expenses they incur performing their job duties. These such as the cost of driving a personally-owned vehicle for their job.

If we read Dynamex literally, it states that when a worker triggers the “ABC” criteria – and is, therefore, an employee – the employer must satisfy all wage requirements for that employee. Does this mean that because 2802 is not covered under the ruling, this worker is not entitled to expense reimbursements? Perhaps. This is an accurate reading of the opinion. But from a practical perspective, how might an employer implement such a distinction? Once a worker is an employee in the wage context, can the employer call her/him something different under 2802? And what business would want to test this logic? Particularly because the court limited its ruling to wages, not as an explicit distinction from other forms of employee payments.

The decision stuck businesses with a choice. They can classify everyone as an independent contractor, knowing that they may lose on a wage claim in court. Or they can classify everyone as an employee, which then requires them to comply with 2802 and reimburse for mileage and other expenses. That is certainly a fair read of the California legal landscape, and one employers grapple with.

Additional Developments

If employers decide to classify workers as employees, they must satisfy federal and state employee protection and compensation law standards. If they don’t comply with these employment-related obligations, they face meaningful legal exposure.

On the flip side, if employers classify their workers as contractors, they must navigate the murky waters of employment law. For example, while some gig economy companies might have considered balancing the risk of the new ABC rule against the now lower risk of class-actions, local governments seem to be stepping in to prevent this. Just weeks after the employee definition changed in California, the San Francisco City Attorney issued subpoenas to Uber and Lyft for records related to whether their drivers should be classified as employees or independent contractors.

And the legal battle doesn’t end there. Gig economy companies in California are now lobbying state Democrats to override the ABC test citing concerns of the ruling “stifling innovation and threatening the livelihoods of millions of working Californians.” So, will the ABC test stand or be repealed? Either way, employers must navigate the complex legal issues associated with worker classification.

What can you do?

No matter how the ABC test and other state labor laws shake out, one thing is certain. Worker classification, either employee or contractor, affects pay structure, the roles and responsibilities of the worker. It also affects whether a company owes certain benefits to that person. Those include insurance, pension, vacation or sick pay, and reimbursement for work-related expenses.

For this reason, businesses must decide how to classify their workers – either employees or independent contractors – and reimburse them appropriately. And employers can reimburse them fairly and accurately with available technology. Cutting-edge software and comprehensive vehicle management solutions can enable companies to confidently navigate the legal landscape. This will ensure they maintain compliance by reimbursing their employees what they are rightfully owed.

While you may not be in California with the ABC test affecting you, or in one of the states with similar laws on the books, the regulatory trend is gaining favor. If you have employees who drive for work, make it a point to seek out solutions that make expense reimbursement fair and accurate, regardless of your employees’ worker classification.

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The Author

Danielle Lackey

As Chief Legal Officer, Danielle is responsible for all Motus legal affairs and works with strategic business units to drive initiatives that bolster IRS and legal compliance for Motus clients. Prior to joining Motus, Danielle co-founded and served as CEO of Cadence Counsel, a company that helps law firms and companies thrive in an environment where work, as we know it, is rapidly changing. Before founding Cadence Counsel, Danielle practiced as a litigator at Latham & Watkins, representing major corporations and senior executives in complex civil and criminal matters. She earned her J.D. with Distinction from Stanford Law School and is a graduate of Brown University (Phi Beta Kappa, Magna Cum Laude).

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