In the UK, the courts and tribunals apply a number of tests and factors to determine if an individual is an employee, a worker (a hybrid status reflecting the view that some individuals, while not full-blown employees entitled to the whole range of employment rights, are deserving of some protection), or self-employed (ie an independent contractor). The application of these tests and factors is complex and important, as the three classifications affect an individual’s employment rights. Traditionally this complexity has led to litigation focusing on whether an individual is an employee or a worker.
The same can be said in California. The question of whether an individual should be classified as an employee has similar significance. If an individual is an employee, the employer bears the responsibility of paying social security and payroll taxes, unemployment insurance taxes and state employment taxes, providing worker’s compensation insurance, and of course, complying with state and federal statutes governing the wages, hours, and working conditions of employees.
Classification of employees in California
The development of increasingly flexible working practices in both California and in the UK, alongside the rapid expansion of the gig economy, has seen the lines become blurred between employment statuses. This has led to an increase in litigation in both jurisdictions and like the UK, recently California has seen important employment status decisions.
The recent California Supreme Court’s decision in Dynamex Operations West, Inc v Superior Court of Los Angeles (Dynamex) is of particular importance. Dynamex is a nationwide package and document delivery company that offers on-demand, same-day pickup and delivery services to individual and business customers. Prior to 2004, Dynamex classified all its California drivers as employees and was obliged to pay them pursuant to the California wage and hour laws. In 2004, as a cost-saving measure, the company decided to reclassify all its drivers to independent contractors. Each of Dynamex’s drivers are required to provide their own vehicles, pay for transportation expenses, purchase and wear a Dynamex uniform and attach company identification to their vehicles whilst driving. The company would obtain the customers, set the charge rates and had sole discretion to assign the deliveries to its drivers. Drivers are permitted to set their own schedule (if notified to Dynamex in advance) and drive for other companies.
In contrast to the position in the UK, the California Supreme Court adopted an ‘ABC’ test presuming that all Dynamex drivers are employees instead of self-employed (independent) contractors, and in so doing placed the burden on any entity classifying an individual as an independent contractor to establish that classification properly. Under the ‘ABC’ test, a worker will be deemed an employee for wage order purposes, unless the putative employer proves:
A. that 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. that the worker performs work that is outside the usual course of the hiring entity’s business; and
C. that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
Each of these requirements must be met in order for the presumption that a worker is an employee to be rebutted, and for a court to recognise that a worker has been properly classified as an independent contractor. For the majority of businesses part B of the test causes the greatest challenge. Indeed, it was the deciding factor in Dynamex. The Supreme Court made it clear that workers whose roles are ‘clearly comparable’ to those of employees in the same organisation will be considered employees under the test. As a result, all drivers of Dynamex are now permitted the protections of the California wage, and labour laws.
However, the classification of employees at the federal level is not the same. Recently, the Wage and Hour Division of the Department of Labor issued a Field Assistance Bulletin (FAB), titled Determining whether nurse or caregiver registries are employers of the caregiver. This FAB provides the Trump administration's first substantive guidance on independent contractor classification. It takes into account the totality of circumstances and evaluates a number of factors when determining the extent of an employee relationship. It is a multi-factor balancing test, with the primary focus being the level of control exerted over the worker. In contrast, the ABC test in Dynamex contains a stricter three-pronged approach with the level of control over the worker being only one factor.
Classification of employees in the UK
The position in the UK is arguably even more complex. The litigation spotlight has increasingly been on the distinction between whether an individual is either a self-employed (independent) contractor or the hybrid status of a worker. The spotlight is less focused on employee status. This has led to an unprecedented surge in the number of cases going to UK courts and employment tribunals, to clarify whether an individual is genuinely ‘self-employed’ (independent) or not and what employment rights they have.
These cases carry significant risk because the liabilities associated with applying the wrong categorisation are large. The distinction between the ‘self-employed’ (independent) and ‘worker’ status is significant in the UK because workers are entitled to a range of statutory protections, including:
For many businesses, particularly those operating in the gig economy, this is a business critical issue, as they are fundamentally premised on the use of self-employed (independent) contractors, with less legal rights then workers and employees.
Determining who is a genuine self-employed (independent) contractor is, however, not straightforward. A genuine self-employed (independent) contractor will not have a contract of employment. However, the existence or not of a contract of employment is not enough alone to safely make a distinction in employment status. It is necessary to consider whether key factors identified in UK case law are also present, such as the ‘irreducible minimum’ of personal service, control and mutuality of obligation. If the ‘irreducible minimum’ is present, then the individual will not be a genuine self-employed (independent) contractor. For instance, an employee is required to provide personal service, whereas it would be consistent with self-employed (independent) contractor status to be able to provide a substitute or to subcontract the work. UK case law has focused on whether the inclusion of a power of substitution in a contract is sufficient of itself to establish self-employed (independent) contractor status, and the extent to which the manner and extent of operation of a substitution clause affects the outcome. As a principle, an unfettered contractual right to provide a substitute is inconsistent with being an employee. However, a conditional contractual right to provide a substitute may or may not be inconsistent with being the hybrid status of a worker. It will depend on the precise contractual terms and the degree to which the right is limited or occasional. Hence the complexity of the situation in the UK.For many businesses, particularly those operating in the gig economy, this is a business critical issue, as they are fundamentally premised on the use of self-employed (independent) contractors, with less legal rights then workers and employees.
When it comes to establishing if an individual is a worker, it is worth remembering that all employees will have the statutory rights enjoyed by workers but a self-employed (independent) contractor will not have the same rights. One of the key questions to be asked is what is the business or professional relationship between the putative worker and employer? More particularly does the individual have a profession or a business undertaking; and, if yes, can the putative employer be characterised as a client or customer of the profession or business undertaking? If yes, then the individual is unlikely to be a worker. In litigation about an individual's status, an employment tribunal will always look at the reality of the working relationship. Indeed, it is open to the tribunal to disregard the label that the parties might have stated in contractual documentation between them.
The recent case, Pimlico Plumbers Ltd and Mullins v Smith, saw the UK’s Supreme Court having to resolve for the first time a number of competing worker status interests. For instance, the engagement of plumbers as self-employed contractors was asserted as a business necessity to minimise costs, whereas the level of control exerted over the plumbers (as asserted on behalf of Smith) was more akin to a traditional employment relationship. The Supreme Court found that although Smith filed tax returns on the basis that he was self-employed, was VAT registered, was entitled to reject work and was able to take outside work, the level of control Pimlico Plumbers had over him and the very limited right of substitution meant he was a ‘worker’.
The Employment Appeal Tribunal (EAT) has also confirmed that taxi drivers operating via the Uber smartphone app are workers. Uber argued that it was only a technology platform, which put drivers in touch with passengers. The EAT found that the contractual documentation between Uber, the drivers and passengers did not correspond with reality. It decided that the essence of Uber's business was the provision of taxi services because the drivers contracted with Uber to personally perform work for Uber (that is, driving passengers who have booked a taxi through Uber). Uber could not be said to be a customer or client of the drivers. On appeal, Uber's argument that it acted simply as agent for the drivers failed. The EAT decided that the drivers were workers for the duration of the time that they were in the territory to which they were assigned, logged into the Uber app, and ready and willing to accept rides.
Recent appeal court decisions in other UK gig economy cases, such as those in Gascoigne v Addison Lee Ltd and Dewhurst v Citysprint UK Ltd have also taken a similar approach. We are seeing more individuals challenging their self-employed status and arguing, with some success, that they are in fact workers. Their success has seen the emergence of a further trend of increasing calls for greater business responsibility and transparency in order to prevent business using contradictory contractual arrangements to deny individuals their legal rights. It is noteworthy that in Dynamex, as a threshold matter, the Superior Court of Los Angeles framed its decision by broadly characterising the misclassification of independent contractors as harmful and unfair to workers, honest competitors, and the public as a whole.
These UK legal cases and the growing societal concerns over the rights of individuals in work have triggered a number of investigations, reports and reviews into the changing nature of work and the UK gig economy. One of the most prevalent reviews is the UK government commissioned Taylor review of modern working practices which was published on 11 July 2017. The Taylor review considers the implications of new emerging business models for both worker rights and employer obligations. The review is underpinned by three main aims: to tackle exploitation, to bring the law on employment status in line with modern working practices, and to increase clarity on employment status.
The review recognises that the current UK employment framework works well, but it is unnecessarily complicated. For our purposes, the review identifies and recommends:
- the term ‘worker’ is defined differently in different pieces of UK employment legislation and needs to be narrowed. The recommendation is that although the current three-tier approach (ie employee, worker and self-employed) should be retained, the term ‘worker’ be replaced in employment law by ‘dependent contractor’. It also proposes that existing legislation be updated and the definition of ‘worker’ be expanded to take account of recent case law;
- employers and/or businesses be obliged to self-declare the status of individuals;
- individuals should have access to a free determination of their employment status so they know if they can bring particular legal claims. It recommends introducing an online tool to provide individuals with an indication of their employment status.
Following hot on the heels of the Taylor review, the Work and Pensions Committee and the Business, Energy and Industrial Strategy (BEIS) Committee carried out a joint inquiry and published their report, A framework for modern employment, on 20 November 2017. This report encourages the UK government to build on and enact many of the Taylor review recommendations and draft legislation was produced for this purpose. The committees’ draft bill was debated in the House of Commons in March 2018 and we continue to monitor its progress.
The report recognises that changes in the UK gig economy promise positive opportunities but these changes also create confusion about the rights and entitlements of workers. This confusion exposes the vulnerability for potential exploitation. The report’s key recommendations include:
- new legislation with clearer definitions of employment status emphasising the importance of control and supervision;
- individuals assumed to have ‘worker’ status in businesses with a workforce over a certain size;
- a requirement for a clear written statement of worker rights and entitlements to be provided within seven days of the start of a worker’s engagement; and
- higher punitive fines and costs orders for businesses that falsely classify workers as self-employed.
Following this report, in early spring 2018, the UK government published its response to the Taylor review, and launched consultations to consider whether:
- the existing case law on employment and worker status tests should be codified in legislation;
- the existing employment and worker tests are still relevant; and
- the Taylor review’s proposal of ‘dependent contractors’ be adopted.
In response to these consultations, the UK’s leading business organisation, the CBI, published its report, Chasing status. The CBI stresses that the flexible labour market has delivered for the UK and that worker status is the bedrock of this market and a key driver of economic growth and prosperity.
Implications for California businesses
It is self-evident that it has become a business imperative for gig economy businesses in both California and the UK to consider carefully the reality of the working relationship with individuals. The recent cases have established that business cannot rely on contractual labels and/or tax structures, as certainly the courts/tribunals in the UK are more interested in the facts concerning mutuality of obligation and the level of control over the performance of the work.
Consequently, Californian businesses operating in the UK and vice versa need to understand the respective employment status landscapes, as they cannot presume that existing operating models will be interpreted in the same way in the opposing legal jurisdiction.
In the UK we may soon see the law diverging from the decades-old ‘worker’ precedent. Whether this will be in a fashion similar to how the California Supreme Court has broadened the definition of ‘employee’ when undertaking the employee-versus-independent contractor analysis, only time will tell. Given the challenges associated with flexible labour markets in both jurisdictions, this is a rapidly evolving area of the law that requires careful analysis and close attention.