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Can Tech Freelancing Survive California’s War on Independent Contracting?

In Dynamex Operations West, Inc. v. Superior Court of Los Angeles County, 416 P.3d 1 (Cal. 2018), the California Supreme Court rewrote the rules used to determine who is an independent contractor for purpose of wages and overtime due under Wage Orders, overturning the more flexible test set by the Court in 1989. The new test is quite restrictive, and makes it much more difficult to classify a worker as an independent contractor. The ruling technically does not apply to areas other than wages, such as employment taxes, unemployment compensation eligibility and the requirement to obtain workers compensation coverage, but the California Legislature is working on a bill that will apply the Dynamex test to all aspects of employment, except for a limited group of professions (doctors, lawyers, hairdressers, etc.).

It is ironic that the state where the gig economy was incubated now seems to be on a mission to eliminate it. So where does this leave the thriving community of Information Technology freelancers and the companies that hire them? The good news is that that the Dynamex case and any related legislation may not impact typical project-focused IT services that are traditionally performed by highly skilled Computer Professionals (as defined by the Computer Professional exemption under federal and California law*).

The Dynamex “ABC test” for qualifying as an independent contractor is as follows:

A: The work must be free from the control and direction of the hiring company in connection with the performance of the work, both under the contract for the work and in actual fact.

Individuals performing sophisticated tech work like writing code or engineering computer systems are likely to free from control and direction within the meaning of this part of the test. No one stands over a programmer’s shoulders and tells them how to code.

B: The worker performs work that is outside the usual course of the company’s business.

An internal software project that involves implementing or upgrading the client’s internal computer software (as opposed to developing software to sell to the client’s customers) would seem to be work that is outside the usual course of the client’s business.

C: The worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.

A freelancer in the IT field is someone who performs project work for different clients and holds him or herself out publicly as an independent. Such individuals frequently advertise their services on the Web, and operate through a business entity such as an LLC. To meet this part of the test, companies using freelancers should avoid “first timers” and stick to experienced independents with a track record of freelancing.

To summarize, it appears that a great deal of traditional IT consulting by freelancers will pass California’s ABC test. Moreover, a California freelancer meeting the definition of “Computer Professional” and making at least $43.58 per hour (the 2019 rate in California) will be exempt from overtime pay, even if found to be an employee, providing an added layer of risk mitigation for companies concerned about overtime pay exposure.

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*A Computer Professional is someone who performs one or more of the following functions:

  •    The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software, or system functional specifications;
  •    The design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; or
  • The documentation, testing, creation, or modification of computer programs related to the design of software or hardware for computer operating systems