| Why the DOL’s New Contractor Rule Won’t Protect You in California |
| Source: SHRM The U.S. Department of Labor’s (DOL) is proposing a new rule on independent contractor classification that may simplify analysis at the federal level but create compliance challenges for multistate employers. While the DOL is moving toward a more flexible, business-friendly framework, states like California enforce far stricter standards. A Return to Economic Reality at the Federal Level Under the DOL’s proposed rule, the analysis asks whether a worker is economically dependent on an employer (and therefore an employee) or is truly in business for themselves. Unlike the 2024 rule’s six-factor, equal-weight approach, the proposal emphasizes two “core” factors: The employer’s degree of control over the work. The worker’s opportunity for profit or loss. If both point in the same direction, there is a strong likelihood of proper classification. Additional factors, such as skill, permanence, and integration into the business, serve as supporting considerations rather than equal determinants. The DOL rule considers multiple, non-exhaustive factors to determine whether the relationship is one of “economic dependence”. No single factor is determinative, making it a more flexible test. This flexibility is intentional. The new rule aims to provide clearer, more business-friendly guardrails. California’s ABC Test: A Much Higher Bar By contrast, California’s ABC test — codified under AB 5 — remains one of the strictest classification standards in the country. Under this framework, a worker is presumed to be an employee unless the employer can satisfy all three prongs: The worker is free from control and direction. The worker performs work outside the usual course of the company’s business. The worker is engaged in an independently established trade. Failure on any single prong results in employee classification. It is often the second prong of the ABC test that is difficult to meet; thus, requiring the worker to be classified as an employee. Where Multistate Employers Face the Greatest Risk For employers operating across jurisdictions, the discrepancy between federal and state standards creates a compliance trap, particularly for remote workforces. Employers attempting a “one size fits all” approach has the potential to create significant risk. Employers often look to use the standards applicable to the state in which the company is headquartered and apply those standards to remote workers or smaller workforces in varying states. However, that approach can often lead to gaps in compliance. The DOL rule does not preempt stricter state laws. Employers must comply with whichever standard is more protective of workers. Red Flag Tips Take proactive steps to reduce exposure. Conduct periodic audits of your independent contractor relationships across those jurisdictions to ensure the contractors are properly classified. Audits should go beyond contracts. Employers must also carefully review the relationship between the contractors and the company, and the work performed in light of the applicable standards. In practice, that means evaluating not just written terms, but actual working conditions — control, integration, and economic independence. For additional information, please call our office at (714) 799-1115 |
