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How AB5 has Changed the Employment Landscape

March 16, 2020 — Jason Morris – Newmeyer Dillion
As a result of California's Assembly Bill 5, effective January 1, 2020, the California Supreme Court's ABC test is now the standard for evaluating independent contractor classifications for purposes of the Industrial Welfare Commission Wage Orders, California Labor Code, and the California Unemployment Insurance Code. That dramatically ups the ante for companies that rely on independent contractors, particularly those that have not re-evaluated such classifications under the ABC test. Misclassification cases can be devastating, especially for misclassified non-exempt employees, and can result in minimum wage violations, missed meal and rest periods, unpaid overtime, unreimbursed business expenses, record-keeping violations, steep penalties, attorneys' fees, and even criminal liability, among other consequences. Misclassifying workers creates enormous risks for companies and is fertile ground for class actions and representative actions under the Private Attorneys General Act (PAGA). The Costs Of Misclassification Are Expensive, And Hope Is Not A Strategy Many business owners I speak to understand AB5 has caused the ground to shift beneath their feet and recognize the resulting risks of misclassifying workers. Despite these risks, companies often balk at taking the necessary steps to evaluate their classifications and mitigate the risk of an adverse classification finding. The most common reason I hear from resistant companies is the worker does not want to be reclassified as an employee and the company trusts the worker ("I've worked with her for years; she won't sue me because she wants to be a contractor"). I get it. Making the change from contractor to employee results in less flexibility and greater administrative burden for everyone involved. While I'm sympathetic, the government is not. Reluctance to change while acknowledging the associated risks amounts to a strategy based on hope. As we say in the Marine Corps, however, "hope is not a strategy." Aside from the sometimes foolhardy belief that a misclassified worker can be trusted to not file suit after a business breakup (when the deposits stop and mortgage bill comes due, guess who's a prime target), companies often fail to recognize the numerous ways in which their classification decisions can be challenged even when they are in agreement with their (misclassified) contractors. Here are just three examples of how your classifications can be scrutinized despite the lack of a challenge by the worker:

• Auto Accidents: Whether delivering products, making sales calls, or traveling between job sites, independent contractors often perform work that requires driving. Of course, sometimes drivers are involved in automobile accidents. When accidents happen, insurance companies step in and look for sources of money to fund claims, attorneys' fees, costs, and settlements. One potential source is your insurance. "But the driver isn't my employee!," you say. You better buckle up because the other motorist's insurance carrier is about to challenge your classification in an attempt to access your insurance policies.
• EDD Audits: During the course of the last several years, the California Employment Development Department (EDD) has increased the number of verification (random) audits it performs in search of additional tax revenue. One reason government agencies prefer hiring entities classifying workers as employees rather than independent contractors is it's a more efficient tax collection method; employers collect employees' taxes on the government's behalf, which increases collection rates and reduces government collection costs. The consequences of misclassification include pricey fines, penalties, and interest.
• Unemployment Insurance, Workers' Compensation, and Disability Claims: In addition to verification audits, the EDD performs request (targeted) audits. Targeted audits may result when a contractor files an unemployment insurance, workers' compensation, or disability claim because independent contractors are ineligible for such benefits. Request audits, like verification audits, can result in costly fines, penalties, and interest if the EDD concludes you have misclassified your workers. Even so, that may not be the worst of it: the EDD often shares its findings with the Internal Revenue Service.

Your Action Plan AB5 has changed the measuring stick, misclassification costs are high, and you do not have complete control of when the government or others can challenge your classifications. So what can you do? Here are several steps all prudent companies should take if they are using independent contractors:

• Conduct an audit of current classification practices;
• Review written independent contractor agreements;
• Implement written independent contractor agreements;
• Update workplace policies;
• Update organizational charts;
• Reclassify independent contractors as employees if necessary.

Jason Morris is a partner in the Newport Beach office of Newmeyer Dillion. Jason's practice concentrates on the areas of labor and employment and business litigation. He advises employers and business owners in employment litigation, as well as advice and counsel related to employment policies and investigations. You can reach him at jason.morris@ndlf.com. About Newmeyer Dillion For 35 years, Newmeyer Dillion has delivered creative and outstanding legal solutions and trial results that achieve client objectives in diverse industries. With over 70 attorneys working as a cohesive team to represent clients in all aspects of business, employment, real estate, environmental/land use, privacy & data security and insurance law, Newmeyer Dillion delivers holistic and integrated legal services tailored to propel each client's success and bottom line. Headquartered in Newport Beach, California, with offices in Walnut Creek, California and Las Vegas, Nevada, Newmeyer Dillion attorneys are recognized by The Best Lawyers in America©, and Super Lawyers as top tier and some of the best lawyers in California and Nevada, and have been given Martindale-Hubbell Peer Review's AV Preeminent® highest rating. For additional information, call 949.854.7000 or visit www.newmeyerdillion.com. Read the court decision
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New York’s Highest Court Reverses Lower Court Ruling That Imposed Erroneous Timeliness Requirement For Disclaimers of Coverage

June 18, 2014 — Robert F. Walsh and Paul A. Briganti – White and Williams LLP
On June 10, 2014, the New York Court of Appeals (the state’s highest court) issued a unanimous decision in KeySpan Gas East Corp. v. Munich Reinsurance America, Inc. (No. 110, June 10, 2014), reversing a lower court decision which had erroneously imposed on insurers a duty to disclaim coverage for property damage claims as soon as possible or risk waiving their coverage defenses. White and Williams represented one of the insurance company defendants in the action. The case involved an action against three excess insurers for insurance coverage for underlying environmental claims arising from Manufactured Gas Plant sites. Upon receiving notice of the underlying claims, the three insurers reserved their rights to deny coverage on various grounds, including late notice of an occurrence, pending an investigation. The insurers ultimately denied coverage on the basis of late notice several years later based on information developed in discovery in the litigation. The policyholder/plaintiff KeySpan argued that the insurers had unreasonably delayed in issuing their disclaimers and that there was a triable issue of fact on whether such a delay amounted to a waiver of the late notice defense. Reprinted courtesy of Robert F. Walsh, White and Williams LLP and Paul A. Briganti, White and Williams LLP Mr. Walsh may be contacted at walshr@whiteandwilliams.com; Mr. Briganti may be contacted at brigantip@whiteandwilliams.com Read the court decision
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Recession Graduates’ Six-Year Gap in Homeownership

October 15, 2014 — Beverley BevenFlorez-CDJ STAFF
According to Zillow Real Estate Research, “Five years after completing their degree, young adults who graduate into a recession still have a lower homeownership rate than peers graduating into normal economic times. But at six years this gap disappears.” Zillow’s research demonstrated “that graduating into a recession has a lasting adverse effect on young adults’ employment and earning, a phenomenon known as labor market ‘scarring.’” Furthermore, “Homeownership is closely tied to the labor market, particularly among young adults, and some preliminary evidence suggests that a similar ‘scarring’ effect occurs with respect to the homeownership rate among young adults who graduate into a weak economy.” Read the court decision
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A Year After Fatal Genoa Viaduct Collapse, Replacement Takes Shape

November 04, 2019 — Peter Reina - Engineering News-Record
Nearly 14 months after the Morandi viaduct collapsed in Genoa, Italy, killing 43 people, crews placed the first section of a 1,067-meter-long, 19-span steel and concrete replacement structure. Reprinted courtesy of Peter Reina, Engineering News-Record








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Deductibles Limited to Number of Suits Filed Against Insured, Not Number of Actual Plaintiffs

December 08, 2016 — Tred R. Eyerly – Insurance Law Hawaii
The court limited the number of deductibles to the counterclaims filed against the insured, not the more than 600 plaintiffs who were parties to the three underlying lawsuits. Probuilders Spec. Ins. Co. v. Yarbrough Plastering, 2016 U.S. Dist. LEXIS 134959 (E.D. Calif. Sept. 29, 2016). Yarbrough entered into contracts with Lenox Homes to provide stucco and drywall services in the homes Lenox would build. Each contract required Yarbrough to indemnify Lenox for any claims resulting from property damage arising out of the performance of the contract. Read the court decision
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Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii
Mr. Eyerly may be contacted at te@hawaiilawyer.com

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Building Supplier Sued for Late and Defective Building Materials

December 04, 2013 — CDJ STAFF
The Lawson Henry Co. bought an unfinished townhome in Snowshoe, West Virginia with the intent of getting it finished and sold. To reach that goal, they contracted with O.C. Cluss Professional Services and O.C. Cluss Lumber Co. to provide them with building materials. According to the plaintiff, Cluss failed to deliver the building materials by the agreed-on date, causing the plaintiff to miss out on the peak season for selling the townhome. The suit also alleges that in addition to materials being delivered late, some were defective or of poor quality. The Lawson Henry Co. is charging Charles C. Cluss and his companies of breach of contract. Read the court decision
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Oregon Court of Appeals Rules That Negligent Construction (Construction Defect) Claims Are Subject to a Two-Year Statute of Limitations

October 20, 2016 — John P. Ahlers – Ahlers & Cressman PLLC
Statutes of limitations are distinct from statutes of repose. There is a lot of confusion between the two. Generally, a statute of limitations is a law which sets the maximum period of time which one can wait before filing a lawsuit, depending on the type of case or claim. The periods vary by state and by type of claim. Most states also employ a “discovery rule,” which provides that the statute of limitations does not “accrue” until such time as the plaintiff knew or should have reasonably known that the injury or property damage has occurred. Read the court decision
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Reprinted courtesy of John P. Ahlers, Ahlers & Cressman, PLLC
Mr. Ahlers may be contacted at jahlers@ac-lawyers.com

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Construction Litigation Roundup: “D’Oh!”

August 12, 2024 — Daniel Lund III - Lexology
The U.S. DOL found itself on June 24 on the wrong end of a preliminary injunction concerning recent changes to the Davis-Bacon Act. The lawsuit, initiated in Texas federal court by the Associated General Contractors of America and other concerned citizens, sought a preliminary injunction barring implementation and enforcement of “specified portions of § 5.2 and § 5.5(e) of the DOL’s ‘Updating the Davis-Bacon and Related Acts Regulations’” – the “Final Rule,” published August 23, 2023. After determining the appropriateness of the “standing” of the plaintiffs based upon the plaintiffs being “adversely affected” by the Final Rule, the federal court preliminarily enjoined enforcement of the Final Rule. In noting its disagreement with the Final Rule, the court stated:

“… the Final Rule amends the DBA [the Davis-Bacon Act] by imposing a stealth selfimplementing DBA requirement in the contract by an operation-of-law provision that contradicts the express statutory language of the Act [the court bristling at the idea that contracts might exclude with impunity the otherwise mandated DBA clauses]. Further, the Final Rule amends the Act to extend the DBA to apply to workers who are not mechanics and laborers, and to extend the scope of the work covered by DBA to include work is not performed ‘directly on the site of the work.’

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Reprinted courtesy of Daniel Lund III, Phelps
Mr. Lund may be contacted at daniel.lund@phelps.com

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