Misclassified Employees in California –Understanding the "Dynamics" between Benefit Law and Employment Law after "Dynamex"
Many employment lawyers believe that an employment law earthquake took place in California on April 30, 2018 when the California Supreme Court adopted a new definition of “employee” in the context of a wage claim arising from a wage order under California’s strict wage and hour laws. See Dynamex Operations West, Inc. v. Superior Court (http://www.courts.ca.gov/opinions/documents/S222732.PDF). Under Dynamex, a worker is an employee unless: (a) their work is not directed or controlled by the employer, (b) the worker performs tasks other than those of the employer’s business and (c) the worker has an independent business. If the Dynamex test is applied across the board to wage and hour claims under California law, many workers who previously qualified in California as independent contractors will fail the new test. And, if Dynamex’s aftershocks reach even farther, all employers need to consider now what Dynamex could mean for employee benefits purposes.
After Dynamex, all employers should review both their benefit plan documents and their existing independent contractor relationships to determine if the plan documents properly reflect the employer’s intent. This is true even if an employer does not now have, but may in the future consider using, independent contractors. (a) Confirm that there is a current, signed plan document (e.g., many health and welfare plans funded by insurance may not have a plan document, often referred to as a “wrap document” –see [cite to what is a wrap document]), and (b) review existing benefit plan documents to be sure they have language that properly reflects the employer’s intent –which is generally to exclude misclassified workers, even if they are later reclassified as employees. See, Vizcaino v. Microsoft Corp., 120 F.3d 1006 (9th Cir. 1997), cert. denied, 522 U.S. 1098 (1998).
After Dynamex, all employers who have California workers should answer the following questions:
Does the Dynamex case apply to our workers? Dyanmex is a California case involving California law, so it’s initial effect will be limited to workers employed in California by California employers (note-residency in California is not a pre-requisite; even non-resident workers of California based employers who work temporarily in California are subject to California’s employment laws). See, Sullivan v. Oracle, 51 Cal. 4th 1191 (2011). However, Dynamex likely does not apply to non-resident workers of non-California based companies who are working temporarily in California. So, for example, if an out of state employer sends an out of state employee to a convention or meeting in California that should not subject that employer to California wage and hour laws. Because this is a complex issue, all employers will want to check with their employment counsel to confirm which of its workers might be covered by the new definition.
Can a worker be an employee for California wage and hour purposes, but not for purposes of its employee benefit plans?Theoretically,yes. The Dynamex case, by its terms, is limited to California wage and hour law, and even more specifically to the wage orders. It remains to be seen whether courts will extend it to other situations. Even if its scope is later expanded, to the extent that a benefit plan is subject to the Employee Retirement Income Security Act of 1974 (“ERISA”), ERISA will often control, rather than state law. Note, however, that ERISA does not apply to all employers and it does not apply to all plans. Even if ERISA does apply,it does not mean that federal law always controls, so whether state law or federal law applies will depend on the situation. The good news is that if a plan is subject to ERISA, the test for determining whether a worker is an employee, or an independent contractor, is based on the federal common law definition which uses a more traditional facts and circumstances test based on the hiring party’s right to control the manner and means by which the work is accomplished rather than the new three-part test established under Dynamex. See Nationwide Mutual Insurance Co. v. Darden, 503 US 318 (1992). The IRS follows a slightly different but similar definition that is also based on multiple facts and circumstances and primarily on control and independence. See: https://www.irs.gov/pub/irs-pdf/p1779.pdf. So, at least for now, a worker could be an employee for California wage and hour law and an independent contractor for purposes of the employer’s employee benefit plans.
How does Dynamex affect employee benefit plans?
To determine the effect on employee benefit plans, an employer will first need to decide if it will need to reclassify any workers as employees for wage and hour purposes and if it desires to do so only for the limited purpose of complying with California wage and hour laws. If so, the employer will need to decide if it is possible, as a practical matter, to reclassify its workers only for wage and hour purposes and not for all purposes.Many payroll systems will not easily accommodate a split approach.
Employers will then need to review their benefit plan documents to determine how such workers should be treated under the current plan document and if that plan document properly reflects the employer’s intent going forward. If the employer wishes to exclude reclassified workers from its benefits plans, in addition to reviewing the plan documents, it will need to review (or forecast) plan operations to confirm that the plan can continue to comply with applicable laws. Examples of the types of issues that should be analyzed include:
Can the plan still meet any applicable mandatory non-discrimination requirements such as those that apply to 401(k) and other qualified retirement plans? In some cases, non-employee workers may be treated as “leased employees” for benefit plan purposes, which also has implications for discrimination testing.
Will an employer that is an “applicable large employer” continue to satisfy the employer shared responsibility requirements of the Affordable Care Act? In general, employers that exclude more than 5% of their full-time employees from required, affordable minimum value health coverage could be subject to substantial tax liability.
If a small employer adds more employees, it could subject that employer to new benefits requirements that are based on the size of the employer (such as the ACA or COBRA) or the size of the plan (such as the need for an independent plan audit).
c. Once decisions have been made about who is an employee and who is not and who is in a plan and who is not, the employer will need to review its plan documents to confirm that they properly reflect the employer’s intent (and that intent should also be clearly communicated to its employees and independent contractors in the summary plan description for the plan and similar communications such as employee handbooks and independent contractor agreements). If the document does not reflect the employer’s intent and practice, it may need to be amended.
We are happy to assist employers (and their employment law counsel) evaluate their employee benefit plans in light of the Dynamex decision, as well as other situations where workers may have been misclassified for employee benefit law purposes.
© Boutwell Fay LLP 2018, All Rights Reserved.This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us.The information contained in this article is effective as of May 31, 2018.