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Are you an employee? Examining the “professional services” exception

Professionals working in a variety of industries and “freelancers” or independent contractors may find that, after January 1, 2020, they became employees of the company the provide services for.

In 2018 the California Supreme Court took a hard look at independent contractor relationships in the case Dynamex Operations West, Inc. v. Superior Court, (2018) 4 Cal.5th 903. The Dynamex opinion created two big changes in the way courts looked at employment relationships. First, Dynamex created the presumption that, in many cases, workers are employees, not independent contractors.  Second, the court issued what is now known as the “ABC Test,” which largely replaced Borello’s “Right to Control” test. With a presumption of employment, employers were required to use the “ABC” test to show that the worker was not an employee.

Following Dynamex, the California legislature enacted Labor Code Section 2750.3, which codified Dynamex to some extent. This new law is not without its quirks and exceptions. In particular, the new law provides that the holding in Dynamex does not apply to a contract for “professional services” in certain circumstances. What does that mean to someone who may be providing “professional services” as independent contractor? It means that in some circumstances, certain professionals will be deemed employees when, under the prior law, they were not.

To determine if a professional’s relationship has changed, the following must be addressed.

First, which “Professional Services” are affected by the New Law?

Under Labor Code Section 1270.3, the “Professional Services” in question include the following:

  1. Marketing, provided that the contracted work is original and creative in character and the result of which depends primarily on the invention, imagination, or talent of the employee or work that is an essential part of or necessarily incident to any of the contracted work.
  2. Administrator of human resources, provided that the contracted work is predominantly intellectual and varied in character and is of such character that the output produced or the result accomplished cannot be standardized in relation to a given period of time.
  3. Properly credentialed/licensed travel agents;
  4. Graphic designers;
  5. Grant writers;
  6. Fine artists;
  7. Properly credentialed/licensed tax preparers;
  8. Payment processing agents through an independent sales organization;
  9. Still photographers or photojournalists who perform work on a limited, project basis;
  10. Freelance writers, editors, or newspaper cartoonists who perform work on a limited, project basis;
  11.  Licensed estheticians, electrologists, manicurists, barbers, or cosmetologists who set their own rates, hours, have their own book of business, and maintains discretion regarding their clientele;

If a worker’s job falls within one of the above categories, then the next step in the process is to determine whether all of the following factors are satisfied:

  1. The individual maintains a business location, which may include the individual’s residence, that is separate from the hiring entity. Nothing in this subdivision prohibits an individual from choosing to perform services at the location of the hiring entity.
  2. If work is performed more than six months after the effective date of this section, the individual has a business license, in addition to any required professional licenses or permits for the individual to practice in their profession.
  3. The individual has the ability to set or negotiate their own rates for the services performed.
  4. Outside of project completion dates and reasonable business hours, the individual has the ability to set the individual’s own hours.
  5. The individual is customarily engaged in the same type of work performed under contract with another hiring entity or holds themselves out to other potential customers as available to perform the same type of work.
  6. The individual customarily and regularly exercises discretion and independent judgment in the performance of the services.

If the professional meets the above criteria, then the professional is presumed to be an employee, and the employer must prove otherwise using the “ABC” test set forth in the statute.

The ABC test itself has three parts, and each has to be satisfied to prove the professional services provider is an independent contractor. Part “A” of the test requires that the worker be 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. Part “B” of the test requires that the worker performs work that is outside the usual course of the hiring entity’s business (e.g., an electrician fixing lights in a restaurant). Finally, Part “C” requires that the worker be actually engaged in an independently established trade, occupation, or business of the same nature as the work performed (i.e., did the worker have his own business license, marketing, and clients?

Confusing? Yes, but the difference between an employee and an independent contractor is significant. Independent contractors lose out on the protection of anti-discrimination laws, wage and hour laws, and family and medical leave laws. Further, they can’t access unemployment insurance and worker’s compensation. Employers face increased liability for the acts of an employee over an independent contractor, and are on the hook for taxes and benefits the employer might not otherwise have to pay.

The information in this article is not intended to, nor should it be considered to be, legal advice, nor does it create an attorney/client relationship. While this article contains a non-exhaustive discussion on recent laws or topics effecting California employees and/or employers, the laws outside of California and/or in federal court may be different than those discussed herein. Further, there is absolutely no assurance that any statement contained in this article is true, correct or precise. The law varies from place to place and it evolves over time—sometimes quite quickly. Even if a statement made herein about the law is accurate, the law may have changed, been modified or overturned by subsequent development since the entry was posted. The article is, at best, of a general nature and cannot substitute for the advice of a licensed professional who can apply it to the particular circumstances of a case. It is intended to initiate further consideration, inquiry, or consultation on the topics discussed. Please contact Urbanic & Associates, Inc. for a full evaluation of your case. In the alternative, please contact a local bar association, law society or similar association of jurists in your legal jurisdiction to obtain a referral to a competent legal professional if you do not have other means of contacting an attorney.