Misclassification Issues in the Sports Industry

For years, employers in the sports industry have reaped the benefits of classifying workers as independent contractors. Even the most competitive professional and collegiate sports conferences, leagues and teams have been known to utilize independent contractors.

Advantages of using independent contractors include massive savings on labor costs, unemployment insurance, workers’ compensation, taxes, and benefits, as well as avoiding liability relating to most wage-and-hour and discrimination laws, and issues under Occupational Safety and Health Administration (OSHA) and immigration laws.

Recently, however, the criteria for how an employer classifies its workers has become the subject of hotly contested legislation that will inevitably result in a floodgate of new wage-and-hour class action lawsuits.

Dynamex and the “ABC Test”

In 2018, the California Supreme Court issued a landmark decision in Dynamex Operations West, Inc. v. Superior Court, establishing a new standard for determining whether employees should be classified as employees or as independent contractors called the “ABC Test.” Under the ABC Test, the burden now falls on hiring entities classifying individuals as independent contractors to justify such classification by proving each of the following three factors:

(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 by the worker for the hiring entity.

The California Supreme Court determined the ABC Test should be broadly applied to claims brought under California’s Wage Orders. Thus, because California’s Wage Orders regulate employment conditions for all industries and occupations in California, the impact of this ABC Test is robust. 

Game-Changing Independent Contractor Law Passes in California

Building off the Dynamex decision, the California legislature recently passed a contentious new law with far-reaching implications for California employers. The newly enacted Assembly Bill 5 (AB 5), set to go into effect on Jan. 1, 2020, will solidify the ABC test for virtually all employment purposes (not just the Wage Orders) and effectively render hundreds of thousands of California workers as employees where they would have previously been classified as independent contractors.

Workers deemed misclassified under AB 5 will now be entitled to unemployment insurance, state family leave, workers’ compensation benefits, and paid sick days. Importantly, workers considered employees under AB 5 may also have the ability to collectively organize as labor unions, depending upon how federal labor law is construed in relation to the new state law. These largescale changes will surely be burdensome – and expensive – to adapt to for businesses who previously relied on a contract workforce.

In terms of scope, AB 5 will apply to all California workers treated as contractors by businesses, minus those granted exemptions by the California legislature. Some of the exempt include:

• lawyers, architects, engineers, private investigators, and accountants;
• doctors, dentists, and veterinarians;
• securities broker-dealers and investment advisers;
• real estate licensees;
• marketers, graphic designers, grant writers, fine artists, certain photographers or photojournalists, and certain freelance writers and editors; and
• human resources administrators. 

Even if workers are exempt from the ABC analysis, that is not a “get out of jail free card.” The hiring entity must still satisfy the “Borello test,” which focuses on the degree of control a business exercises over the manner and means of accomplishing the desired work.

AB 5’s Impact on Business-to-Business Arrangements

Although much of the publicity surrounding AB 5 has rightfully centered on individuals working as independent contractors, businesses have also expressed concern that legitimate “business-to-business” relationships could be swept up in the ABC test as well. Many believe the way the statute is worded could result in misclassification claims brought against a business by the workers of a vendor hired by that business.

Specifically, AB 5 identifies “business service providers,” who provide business services to “contracting businesses,” as exempt from the ABC test’s reach. To satisfy the exemption, however, a contracting business bears the burden of establishing that each of its “business service providers” satisfy 12 factors – many of which are difficult to satisfy for any business.

Business groups have expressed concern that a “business-to-business” relationship that fails to meet these 12 specific factors would automatically come within the gambit of the ABC test. However, in a “Letter to the Journal” expressing her legislative intent, the author of AB 5 stated, “Importantly, while this provision exempts certain bona fide business-to-business contracting relationships from the holding in Dynamex if the criteria are satisfied, [it] is not intended to suggest, by negative implication, that the business services provider is necessarily an employee if those criteria are not satisfied.” This language may prove useful for the proposition that there are other legitimate business relationships (besides those that satisfy the criteria set forth in AB 5) that nonetheless fall outside the reach of Dynamex. 

Retroactivity

As of now, courts will likely apply Dynamex and AB 5 retroactively, at least as to the independent contractor misclassification analysis. However, in Sept. 2019, the U.S. Court of Appeals for the Ninth Circuit certified the retroactivity question and asked the California Supreme Court to clarify whether the Dynamex decision should be applied retroactively. A decision is forthcoming.  

Going Forward:How Sports Businesses Can Avoid Misclassification Claims

Going forward, California employers across all industries should carefully assess their independent contractor relationships in light of Dynamex and AB 5. Companies with non-compliant independent contractor relationships should rectify those relationships immediately, given the statute’s potential retroactive effect.

Companies subject to AB 5 should maintain a written agreement with contractors containing an indemnification clause, as well as arbitration agreements containing class action waivers. The arbitration agreement that companies use for their contractors should be different than the agreements used for company employees.

Finally, companies must evaluate their business-to-business and vendor relationships to ensure compliance with AB 5. Companies must be cautious when working with vendors that do not work at separate locations or with other clients. Companies should also consider revising existing vendor agreements to include AB 5 factors and additional provisions, such as indemnity and audit rights.

Simply put, sports businesses must learn their ABC’s and adjust, or suffer the potential consequences.

Adam F. Sloustcher is an associate with national labor and employment law firm Fisher Phillips in San Diego, Calif. Adam may be reached at [email protected].

Jason A. Fischbein is an associate with national labor and employment law firm Fisher Phillips in San Diego. He may be reached at [email protected].