Recruiting agencies that make contract placements and classify their candidates as independent contractors may not be able to do so any longer.
A little over a year ago, the California Supreme Court issued a ruling that made it more difficult for employers to classify their workers as independent contractors. The ruling was the result of a class-action lawsuit against Dynamex Operations West, a package and document delivery company (Dynamex Operations West, Inc. v. Superior Court).
In issuing this ruling, the California Supreme Court decreed that the “ABC Test” should be used to determine correct classification. That test is spelled out as follows:
(A) 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.
(B) The worker performs work that is outside the usual course of the hiring entity’s business.
(C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
So this means that if a worker can not pass all three aspects of the “ABC Rule,” they should be classified as a W-2 employee and NOT as an independent contractor.
So what’s important about this? Three weeks ago, California took another step in regards to this issue, as Governor Gavin Newsom signed Assembly Bill 5 (AB5) into law. The bill, introduced in January of this year, codifies the ruling made by the California State Supreme Court last year. In other words, the bill involves the application of the “ABC Test” in the workforce.
Which means that employers in the state will have to prove their workers are actually independent contractors. Which means that recruiting agency owners who are classifying their contract workers as independent contractors will have to prove their workers are actually independent contractors.
The days of getting away with misclassifying contract workers as independent contractors is quickly coming to an end.
So at this point, you might have some questions regarding this issue and what has transpired recently surrounding it. Fortunately, we have answers:
#1—C’mon, this ruling just affects employers whose business model revolves around independent contractor-style work, right, companies like Uber and Lyft?
That is incorrect. This new bill affects ANY business owner who is misclassifying their workers. And yes, as mentioned above, this includes recruiting agency owners that place contractors at their client companies, run those contractors through their own back-office, and classify those contractors as independent contractors. If you do business in the state of California, this practice will soon come under intense scrutiny.
#2—All right, well… I don’t conduct business in California. So I’m home-free, right?
Not exactly. There is an excellent chance that what California is doing in regards to the issue of worker classification is only the beginning. What starts there will more than likely spread to other states. Consequently, it’s probably only a matter of time before your state legislation joins the crowd.
In fact, here are other states that are currently addressing this issue in other ways. Those states include the following:
- New Jersey
- New York
- North Dakota
If you operate a recruiting agency or place candidates in one of these states, then you should know you’re state’s official stance in regards to the classification of workers. (Or in this case, the misclassification of workers.)
#3—Okay, I guess I might be misclassifying my contractors? What can I do to get ahead of this?
Simply put, you should start classifying your contractors as W-2 employees if they don’t pass the ABC Test. Now, of course, this could pose a different set of problems for you if your agency is not set up as a W-2 Employer of Record. The reason: only an agency that can act as a W-2 Employer of Record can employer W-2 employees. (Makes sense, does it not?)
This is why you should seriously consider using a W-2 Employer of Record service. An Employer of Record can assume the responsibility and liability as the legal employer.
This way, you don’t have to worry about bills like Assembly Bill 5. You don’t have to worry about paying heavy penalties and fines when you’re found to be misclassifying your contract workers. But best of all, you can just focus on what you like most and do the best—recruiting, placing candidates, and cashing placement checks. If you have any questions about what an Employer of Record Service is, visit foxhire.com for more information!