California Supreme Court Reclassifies Your Independent Contractors

  • Goldberg, Phillip, CSA Attorney
| Aug 13, 2018

goldbergUntil recently an anesthesia practice had two options for engaging anesthesiologists: employee or independent contractor.[1]  The correct classification was (and continues to be) relevant for qualified retirement plan participation and other benefits, workers’ compensation insurance coverage requirements, unemployment insurance, disability insurance and accommodation, malpractice insurance coverage, third party liability and insurance, timing and amount of compensation, leaves of absence, and sick pay, among other things.  Ultimately, the most significant factor in determining whether someone should be engaged in one category or the other was control.  To the extent the practice exercised greater control over the anesthesiologist he or she was more properly considered an employee.  The significance of control in the classification of workers necessarily created tension.  The practice clearly wanted to control those who are treating patients for convenience, quality, compensation, and other reasons.  However, to the extent the practice was granted more control (or actually exercised more control regardless of the terms of the agreement) it ran a greater risk of “reclassification.” In any event, the vague nature of the control factor allowed many anesthesiologists to be engaged as independent contractors without too much concern the classification would be challenged.  The consequences of reclassification could be significant and include disqualification of retirement plans with resulting tax liabilities, liability to third parties that may not be covered by any insurance, and statutory liability for failure to comply with laws governing the amount and timing of compensation and benefits, among other things. 

On April 30, 2018 the California Supreme Court issued its decision in Dynamex Operations West, Inc. vs. Superior Court.  This decision drew a much more narrow definition to determine if a particular anesthesiologist is properly treated as an independent contractor with respect to laws governing the amount and timing of compensation.  Unfortunately, under the new, narrowly defined rule it is virtually impossible for an anesthesia group to treat an anesthesiologist as an independent contractor without significant risk of reclassification and potential liability for failure to comply with the many and various technical requirements on payment of compensation to employees.  To be sure, not every anesthesiologist engaged as an independent contractor was properly classified as such under the pre-Dynamex rule, but the ability to defend independent contractor status was much greater than it is now.

In the Dynamex decision the Supreme Court concluded “that the suffer or permit to work standard properly applies to the question whether a worker should be considered an employee or . . . an independent contractor.”  Under this standard, if an anesthesia practice allows an anesthesiologist to work under its hospital contract or to bill services under the group’s tax identification number or payor contracts the practice has suffered or permitted the anesthesiologist to work.  Since this broad definition could include obvious independent contractors (the classic example of a plumber as independent contractor was used), the court adopted a simple test for independent contractor status. 

As a preliminary matter the court established a presumption that all workers are employees.  A worker may only be properly treated as an independent contractor under the wage order at issue if a three-part test is met.

  • First, the worker must be free from the hiring business’ control. 
  • Secondly, the worker must be engaged in an independently established trade or business as demonstrated by providing similar services for others or other indicia. 
  • Finally, the work performed is outside the usual course of the hiring entity’s business. 

Since all three parts of the test must be met to classify a worker as an independent contractor, the test will not be met when an anesthesia practice hires an anesthesiologist to provide anesthesia services. 

The original plaintiff in the Dynamex case was a delivery driver who provided services to Dynamex for a total of 15 days and filed a lawsuit against the company three months after leaving his short engagement.  In rendering its decision that a three part “ABC test” should be applied to determine proper worker classification, the court was interpreting a Department of Industrial Relations’ wage order regulating wages, hours and working conditions in the transportation industry.  Given the facts and circumstances of the case it might appear the decision could be distinguished on both a legal and factual basis from the anesthesia group engaging an anesthesiologist to provide anesthesia services.  Unfortunately, these distinctions are not likely to control the resolution of the claim brought by the independent contractor anesthesiologist asserting he or she was misclassified and is now entitled to statutory penalties and attorneys’ fees.  The separate wage order applicable to “professional occupations” includes the very same language found in the transportation industry wage order interpreted in Dynamex.  The fact that the delivery driver was subject to the overtime laws and the independent contractor anesthesiologist is likely to be exempt from these laws, is also unlikely to control the resolution of the claim.  The exemption from the wage orders applicable to professional employees applies to Sections 3 through 12 of the wage orders, and the “suffer or permit to work” definition that the court relied on to establish the ABC test is found in Section 2.  In brief, Dynamex can be applied to anesthesia groups engaging anesthesiologists as independent contractors. 

What are the consequences to the anesthesia group which has been engaging an anesthesiologist as an independent contractor in light of the Dynamex decision?  The group is susceptible to a claim by any such contractor that the group has not complied with those California Labor Code provisions that dictate specific terms related to compensation.  For instance, the independent contractor may claim that he or she was not paid frequently enough, that the period of time between the end of the work period and pay day did not comply with statutory limitations, or that he or she did not receive a pay stub with each check that included all statutorily mandated information.  A successful claim by a single independent contractor on this basis is not likely to create significant liability for the anesthesia group.  However, the independent contractor may bring a “private attorney general action” sometimes referred to as “PAGA” which allows the contractor to recover for other misclassified independent contractors, imposes separate and additional penalties, and creates the opportunity for an attorneys’ fees award which makes a potentially low damages case attractive to plaintiff attorneys. 

The safest approach for dealing with Dynamex decision is to convert all independent contractors to employee status with all deliberate speed.  Although this increases both the total costs of hire and administrative burdens, it is clearly the most secure resolution.  Documenting the independent contractor’s wish to be engaged as an independent contractor and prospectively waiving statutory rights under the California Labor Code will not solve the problem because these rights are not waivable. If the worker is an employee under the ABC test, the worker has unwaivable rights that can be asserted notwithstanding a contractual waiver. 

Efforts are underway by a large coalition led by the California Chamber of Commerce seeking a regulatory or legislative fix to the problems created by Dynamex including urgency legislation to pause the effect of the Dynamex decision and reinstitute the previous rule until a more comprehensive and long-term remedy can be implemented.  The coalition is very interested in have physicians participate in its activities.  More information can be found here

[1] Some anesthesia groups are organized as partnerships and have the option of incorporating anesthesiologists into the practice as partners and not as employees or independent contractors.  The legal issues discussed in this article are not applicable to partners.  For practical reasons, it is unlikely that an anesthesiologist engaged by a partnership as an independent contractor is a good candidate for partnership.



Leave a comment