Independent contractors can come in very handy for a cannabis business. They may be useful for everything from developing product lines to infrastructure build-out. As a legal matter, correctly classifying workers associated with cannabis businesses as either an independent contractor or an employee is extremely important. Misclassifying an employee as an independent contractor can come with hefty civil penalties for failure to pay payroll taxes, unemployment insurance, and other state mandated benefits. Willful misclassification of workers even comes with criminal liability in some states.
California’s Supreme Court recently issued a ruling that will make it much more difficult for companies to classify workers as independent contractors in that state. In Dynamex Operations West Inc., v. The Superior Court of Los Angeles County, delivery drivers that had been classified as independent contractors filed a class action lawsuit against Dynamex for violations of California wage orders and misclassification. The Supreme Court, in a sweeping decision, eliminated the complex, ten-factor test that was used to determine if a worker was an independent contractor or an employee. The Supreme Court in Dynamex set a new, much simpler, standard. Workers are presumed to be employees of the company unless the employer can establish:
- “That the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
- That the worker performs work that is outside the usual course of the hiring entity’s business; and
- That the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.”
Simple, right? The new test requires the employer to prove all three factors, making it more difficult to classify workers as independent contractors and not employees. This places the burden squarely on the business, and it’s a fact-intensive question. Ultimately, whether the business calls the worker a contractor or an employee makes no difference.
California is not the only state to move away from complex multi-factor tests to determine if a worker is an independent contractor or an employee. The Washington legislature is considering a similar rule and Massachusetts and New Jersey are already applying a similar test. In every case, the laws seem to be moving forward with the goal of protecting workers, even if that increases costs for businesses.
The new California rule will be most difficult on new and expanding marijuana companies, which is most of them. Many new companies typically hire independent contractors before they can afford employees. Given the Dynamex decision, California cannabis companies should carefully review their worker relationships to ensure they meet all three parts of the new test. Cannabis companies in other states should also carefully consider whether their independent contractors meet this test as well. As always, it is better to stay in front of these issues rather than fix them after litigation has started. Just ask Dynamex.