As California’s AB 5, AB 2257, as well as Prop. 22 and the millions of dollars poured into that campaign have all demonstrated, whether a hiring party can prove a worker is an independent contractor (IC) makes all the difference in the world. This status can give rise to significant cost savings, including relief from payroll taxes, avoidance of workers’ compensation coverage, and steering clear of overtime or minimum wages.
Although it has attracted little attention from the workers’ compensation industry in the last couple of years, a significant piece of legislation found its way out of Sacramento in 2024. Effective Jan. 1, 2025, the Freelance Worker Protection Act (SB 988), imposed minimum contractual and payment requirements on companies that hire freelance workers.
Effective for contracts entered into or renewed on or after Jan. 1, 2025, the objective is to provide workers with prompt payment, enhanced stability, and predictability. In so doing, it provides alleged employers with additional evidence to demonstrate the worker truly is an IC.
The Act does not change the legal classification test, [footnote 1] which still remains the “ABC Test” that enunciated in the California Supreme Court’s landmark decision, Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018).
The “ABC Test” determines if a worker is truly an IC, or whether they should be classified as an employee.
Instead, SB 988 imposes new regulations on the contractual relationship between those already properly classified ICs and their clients.
Contract Particulars
Applying to contracts exceeding $250 (whether a single contract or multiple contracts totaling $250 within 120 days), the hiring party must provide a signed copy of a written contract with names and addresses of parties and a comprehensive list of all services (specifying their value, rate, and the method of compensation).
It must also include such information as the compensation is to be paid or mechanism used to determine the rate, the date by which the freelance worker must submit completed services or an invoice for timely payment processing. Hiring parties must retain all executed contract copies for at least four (4) years.
If there is no specified date for payment to the IC for their services, then payment must occur within 30 days of completion of the work.
Protection Against Retaliation and Contract Changes
The Act is designed to preclude unfair practices sometimes employed after work has been completed, such as a prohibition of conditional payment (e.g. a reduction in the contracted compensation or requiring more than the previously agreed-upon goods/services). Also, a hiring party cannot punish or retaliate against a worker (e.g. firing or cutting pay) for exercising their rights.
Penalties and Enforcement
A worker, the Labor Commissioner, or public prosecutor can file a lawsuit to enforce the Act. A worker may be entitled to attorneys’ fees and costs, along with other possible remedies like damages up to twice the unpaid amount if payment was late.
Impact on Workers’ Compensation
When an individual files a workers’ compensation claim asserting they are an employee who was improperly misclassified as an independent contractor, the hiring entity faces a significant challenge. A crucial piece of the defense is a robust, formally executed IC agreement.
A contract created per SB 988 provides strong evidence that the worker was genuinely treated and intended to be a bona fide IC. In particular, if well-written, this contract:
- Documents the mutual understanding and intent of both parties to work per a contractorship.
- Outlines the terms, responsibilities, and control that are consistent with an IC relationship. This is assisted by underscoring the contractor’s ability to control their own work schedule, provide their own equipment, or hire subordinates.
- Demonstrates the hiring party’s good-faith efforts to comply with the law governing IC relationships.
Though the contract provides evidence, it is not a complete shield. The ABC Test is the primary legal standard for determining worker classification. A court (or the WCAB) will look beyond the contract’s language and examine the actual practice to determine if the worker satisfies all three prongs of the ABC Test.
Nonetheless, when facing an employee-IC disagreement, it is incumbent upon the adjuster and/or defense attorney to contact an employer representative and obtain a copy of a contract created per the dictates of the Freelance Worker Protection Act. Contact with the drafter of the contract should be made in most cases and potentially using their testimony deserves strong consideration.
CONCLUSION
Independent contractor agreements mandated by SB 988 could serve as a very useful piece of evidence in defending against misclassification allegations. Those who hire independent contractors could really benefit by simply abiding by SB 988’s requirements, which are now the law.
[Footnote 1]: Under the “ABC Test”, a worker is an employee, not an IC,, unless the hiring entity satisfies all three tests:
- A: Worker is free from control and direction of hiring entity in connection with performance of the work, both under the contract for performance of the work and in fact;
- B: Worker performs work outside the hiring entity’s usual course of business; and
- C: Worker is customarily engaged in independently established trade, occupation, or business of the same nature as that involved in the work performed.
Don R. Barthel is one of the founding partners of Bradford and Barthel, and is based in the firm’s Sacramento office. He has taken thousands of doctor depositions and is an expert on the AMA Guides to the Evaluation of Permanent Impairment. If you have any questions about workers’ compensation defense issues, please feel free to contact him at 818.654.0411 or via email at dbarthel@bradfordbarthel.com.
Viewing this website does not form an attorney/client relationship between you and Bradford & Barthel, LLP or any of its attorneys. This website is for informational purposes only and does not contain legal advice. Please do not act or refrain from acting based on anything you read on this site. This document is not a substitute for legal advice and may not address every factual scenario. If you have a legal question, we encourage you to contact your favorite Bradford & Barthel, LLP attorney to discuss the legal issues applicable to your unique case. No website is entirely secure, so please be cautious with information provided through the contact form or email. Do not assume confidentiality exists in anything you send through this website or email, until an attorney/client relationship is formed.