Dynamex Creates Chaos: Creative Firms Struggle With Their Relationships With Freelancers After the 2018 Court Ruling

July 25, 2019

Sacramento Business Journal

In 2018 a California Supreme court ruling commonly known as the Dynamex decision fundamentally changed the relationship between employers and independent contractors. The Sacramento Business Journal reports that the decision has set new standards for when a worker classifies as an employee as opposed to an independent contractor. Further, the decision may end up disrupting the way marketing, media and public relations firms do business with outside writers, photographers and graphic designers. In the article, Downey Brand partner and employment attorney Elizabeth Stallard offers her thoughts on the “gray areas” and other challenges facing employers in light of the recent decision.

See full article below or view it online at Sacramento Business Journal.

By Mark Anderson for Sacramento Business Journal

Marketing, media and public relations firms are struggling with the implications of a recent court ruling that has greatly complicated their relationships with freelance creative workers.

The California Supreme Court decision known as the Dynamex ruling requires businesses to classify many more workers as employees rather than independent contractors. This has the potential to disrupt relationships with writers, photographers and graphic designers that the media and marketing industries have long relied on.

“It has certainly been a subject of discussion for us,” said Brenda Forman, vice president with Merlot Marketing Inc. in Sacramento. “It has prevented us from testing out new designers who are just starting out.”

WHAT’S THE DIFFERENCE?

The Dynamex decision, handed down in April 2018, set a new standard for when workers can be classified as independent contractors and when they must be classified as employees. In most cases, it bars companies from using a freelance outside independent contractor to perform tasks that the firm also does internally, Forman said. In the contract-by-contract world of public relations and marketing, that structure doesn’t allow for spikes and ebbs in workflow, she said. “It prohibits us from being more agile.”

Dynamex is the shorthand name for a class-action lawsuit started over a decade ago about the employment status of delivery drivers for a company called Dynamex Operations West. In the ruling, which was upheld on appeal to the state Supreme Court in April 2018, the company was found to have incorrectly classified its drivers as independent contractors when they were in fact employees.

The state Supreme Court’s unanimous decision has since been applied to many occupations besides delivery drivers and is now affecting all manner of workers from barbers, hairdressers and dancers to freelance writers, designers and photographers.

ABC Test

Dynamex says that workers who perform the work the company essentially is in business to do are in fact employees and cannot be paid as independent contractors.

The 83-page ruling says workers are presumed to be employees unless they can meet three specific tests to be called independent contractors.

The distinction is important because employees are eligible for additional benefits and protections, and employers have to pay additional taxes for employees.

The three specific parts, or “ABC test” of independence are: The person works without control and direction from the employer; the person performs work outside the scope of the usual business of the company; and according to the ruling, the “worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.”

WHAT IS THE ABC TEST?

Chris Holben, president of Runyon Saltzman Inc. in Sacramento, said most public relations firms had been used to using independent freelance designers on projects for four to six weeks at a time. That doesn’t work anymore under Dynamex. The public relations firm can’t use an independent designer unless they are acting completely independently and without direction of the firm, and that’s pretty much impossible, he said.

One of the hallmarks of what constitutes an employee under the Dynamex test is whether the person takes direction from the employer.

“If you are giving them any direction, they are an employee,” Holben said.

The ruling has changed the way Runyon Saltzman works, he said. The changes include going so far as hiring employees to get around the rules and also creating temporary employee relationships for some projects.

“We would support an amendment to make it work better,” Holben said.

Another standard under Dynamex is whether the person uses company equipment. If they do, they are an employee, Holben said.

“We understand the reason for the law, but we feel it’s onerous and we think it is over-applied,” he said. “It is very challenging. We have done everything we can do to comply, but it doesn’t work for the employer or the employees in a creative industry. A lot of the independent contractors like being independent, and they don’t want an employee position.”

Gray Areas

Even though the ruling is more than a year old, many employers are still catching up to its implications, said Elizabeth Stallard, a partner at Sacramento law firm Downey Brand LLP.

“A lot of employers that thought they weren’t employers have been struggling with Dynamex. It has been a challenging period for businesses,” she said.

In some cases, employers may believe that if a creative freelancer incorporates into a business entity, then the relationship becomes one of a business-to-business transaction rather than an employer-employee relationship, but Stallard said that incorporating into a sole proprietorship might not be enough of a distinction to defend a Dynamex challenge.

The California Employment Development Department offers a seven-page test employers can use to determine if a worker can be an independent contractor. Holben said that’s been helpful, but he said there are still some gray areas.

As an example, his firm does marketing campaigns routinely in English and Spanish. If there was a one-time use of a translator to produce something in Tagalog, an Austronesian language, is that routine or not, he asked.

“If that person does what you are in the business of doing, then you are taking a risk” if a business chooses to pay them as an independent contractor, said Kim Silvers, founder of Silvers HR LLC, a human resources management company in Granite Bay. She also said that under California law, only attorneys are allowed to advise clients on employee status.

One of the benefits for employers using independent contractors is that they are generally less expensive than employees, for whom a business must pay taxes, insurance and other costs and potentially benefits, she said. She said she sees it in her industry, where some companies use independent contractors, whereas she has employees. “We hang our hat on that,” because her employees tend to have longer tenure, loyalty and training.

“A lot of employers that thought they weren’t employers have been struggling with Dynamex. It has been a challenging period for businesses,” she said.

The potential penalties for failing to comply with Dynamex aren’t trivial. Civil penalties range from $5,000 to $25,000 per violation. Plus, the state can demand all unpaid back state payroll taxes with an additional 10% penalty for “unpaid taxes,” according to The Watkins Firm, a San Diego-based law firm.

“As long as we can clearly check off the ABCs then we can clearly say they are a freelancer,” said David Stogner, director of people and culture with the Sacramento, Chico and Reno News & Review publications, and custom publisher N&R Publications.

The publications have always had a mix of staff writers and editors, as well as a roster of freelance contributors.

The publications’ relationship with their freelancers is that of a purchaser of a professional product they are delivering, Stogner said.

“We don’t have any control over them. We don’t set hours for them. We don’t require them to come into staff meetings,” Stogner said. “I’m fairly confident this is something that we will be able to do.”

The company has 122 employees, including its delivery drivers, advertising representatives and many of its editorial staff, Stogner said. “Whenever it is in question, we make sure that they are employees.”

The economy has changed in recent years, and there is more demand for part-time, independent and specialty workers, said Donna Lucas, CEO of Lucas Public Affairs. “More and more workers have multiple jobs and employers, giving them greater flexibility and the freedom to take care of children or continue their education.”

As a small business owner, she said “we need to allow independent consultants the ability to control their own schedules and provide specialty services to businesses.”

She said it is also important that all workers have access to basic benefits like health care, retirement and sick leave, but the state needs to find a middle ground that allows for part-time, independent and specialty workers “with the safety net they need while maintaining the flexibility that many of them want.”

There must be a solution that can protect people without “driving business expenses up to the point that employers stop hiring independent consultants, because then both businesses and workers suffer.”

The Legislature Weighs In

A bill before the State Legislature would essentially codify the Dynamex decision in state law.

Assembly Bill 5, introduced last December by Assemblywoman Lorenz Gonzalez (D-San Diego), passed the Assembly in May and is currently before the State Senate Appropriations Committee.

The bill, which would keep Dynamex’s limits on the use of independent contractors for most industries, is intended to help gig economy workers, such as drivers for Lyft and Uber, by making them eligible for the minimum wage, overtime, sick leave and other benefits. It is supported by unions and labor interests.
But the bill’s effects would reach far beyond gig economy companies, said Shawn Lewis, policy director for the National Federation of Independent Business California.

“We are concerned that this new ABC test undid three decades of labor law without any public input or debate,” he said.

The NFIB opposes the bill unless it’s amended to include a broad exemption for business-to-business relationships.

As it’s currently written, AB 5 already exempts some occupations, according to a fact sheet provided by Gonzalez’s office. Those include professions that require licensing, such as lawyers, architects, engineers, veterinarians, private investigators and accountants. It also exempts professions that require advanced degrees and specialized studies in fields such as marketing or human resources administration.

Some freelance writers would also be exempt. The loophole would apply to writers who make no more than 25 contributions to any one publication for a rate equivalent to at least twice the minimum wage for the hours worked and who retain their intellectual property. That creative workers’ exemption would also apply to fine artists, professional grant writers and graphic designers.

More exemptions are still possible, Gonzalez’s communications director Samantha Gallegos said.

“We are still working on refining the language as it applies to writers in addition to other professionals in the media industry,” she said.

The California Chamber of Commerce would support AB 5 pending some amendments to make it broader and more flexible, specifically with more exemptions for professionals, according to its July 3 letter to Gonzalez. In that letter, CalChamber specifically seeks exemptions for freelance writers, photographers, graphic designers and videographers, among others including musicians, travel agents and consultants.

In a new development this week, a federal appeals court on Monday withdrew its previous decision that the Dynamex decision could be applied retroactively. The U.S. Court of Appeals for the 9th Circuit is now sending the case back to California Supreme Court to decide whether its own ruling applied retroactively.