Nonprofits Insurance Alliance

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Changes to Independent Contractor Classification in California

While businesses have traditionally subcontracted certain tasks to independent contractors, the on-demand or “gig” economy has seen this practice skyrocket with the business models used by Uber, Lyft, GrubHub, TaskRabbit and many other tech companies. To a limited extent, nonprofits also depend on independent contractors to perform functions where regular staff do not have the expertise, or for temporary or limited projects.

There is little risk when subcontracting is done through a business, such as hiring a temporary worker through a staffing agency where the worker is the employee of that agency. But when a nonprofit is hiring an individual worker to perform tasks that falls within the scope of the nonprofit’s mission, the classification of independent contractor just became much more risky due to the recent California Supreme Court decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles.

In its lengthy decision, the Supreme Court analyzed the basic public policy objective of the California Wage Orders, which were adopted to establish minimum wage, overtime, and meal and rest breaks for non-exempt employees. The court noted that these laws ensure responsible employers are not hurt by competitors realizing the potentially substantial economic benefits of substandard employment practices (such as non-compliance with minimum wage, overtime, meal and rest breaks, insurance benefits, etc.), that could result in a “race to the bottom.”

After analyzing the definition of “employee” under the Wage Orders, as well as the existing multi-pronged independent contractor test and legal tests used by other jurisdictions, the Court determined that a simplified “ABC” test should be used to evaluate whether a worker is classified as an independent contractor for purposes of California Wage Orders.

So how does this simplified test work? The ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors ONLY IF the hiring business demonstrates that the worker in question satisfies all three of the following conditions:

  • A. – That the worker is free from the control and direction of the hirer 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 that involved in the work performed.

So if the worker meets conditions A and C, but not B, because they are not working outside the usual course of the hiring employer’s business, then the worker must be classified as an employee.

The most difficult prongs of the test to meet for most workers will be prongs B and C, so nonprofits analyzing worker classification should likely start with their mission statement and purpose. If an employee is working to further that mission, then under condition B, that worker is likely an employee and no further analysis is necessary.

Going on to condition C, by way of example, while a plumber or an IT technician are not likely to fall within the mission of a social services nonprofit, whether they are in an independently established trade, occupation or business will need further examination. A licensed plumber in a separate business clearly is, but an IT technician may or may not be. Condition A, who directs and controls the worker in the performance of their work, will always require a case-by-case evaluation.

Finally, remember that this Supreme Court case involved the definition of “employee” for purposes of the California Wage Orders. Different employment laws have different definitions of “employee,” so it is possible that a worker may properly be classified as an employee with reference to one law but not another. Nevertheless, once a worker is classified as an employee for Wage Order purposes, they likely should be similarly classified for all other compliance purposes.

Nonprofits that have workers classified as independent contractors now or over the past three years (the applicable statute of limitations on wage claims) should re-evaluate that classification under this narrowed definition to assess whether there is potential liability for wages or penalties for the work performed.

Changes to CA Marijuana Laws Leave Employers Unaffected

In the 2016 election, California voters passed Proposition 64, which decriminalized the recreational use of marijuana and made California the 8th state where such use is legal. This change came after decades of recreational use being outlawed, and more than 20 years since the decriminalization of medical use with the enactment of the California Compassionate Use Act of 1996. Proposition 64 also created a wide variety of changes in the institutional and cultural treatment of marijuana in the state, including regulation of cultivation, sale, taxing and use, which went into effect on January 1, 2018.

As was encountered with the decriminalization of medical marijuana 22 years ago, changes to the law have created some uncertainty as to how the law affects employer’s ability to control the use of marijuana by employees under Drug-Free Workplace policies. The resolution of any uncertainty begins with the simple reality that, despite the new direction California and several other states have taken, the sale and use of marijuana remains federally illegal. The continued illegality of marijuana under federal law created the necessity for the California Supreme Court to clarify the effect of the medical marijuana law on an employers’ ability to regulate its use and impact in the workplace.

In the 2008 case Ross v. RagingWire Telecommunications, Inc., the Court upheld the termination of an employee who tested positive for marijuana despite their having a valid prescription. The Court noted that the Act only removes criminal penalties for authorized medical use and nothing more. Marijuana use remained illegal under federal law and thus, the use of medical marijuana was not considered the same thing as the use of other “legal” prescriptions. In the 2012 case James v. City of Costa Mesa, the court ruled similarly, finding that because federal law does not authorize marijuana use, users may not seek protection under the Americans with Disabilities Act (ADA) either.

The newer law relating to recreational use does not deviate significantly from these rulings. Proposition 64 specifically states that it does not amend, repeal, affect, restrict, or preempt “the rights and obligations of public and private employers to maintain a drug and alcohol free workplace or require an employer to permit or accommodate the use, consumption, possession, transfer, display, transportation, sale, or growth of marijuana in the workplace, or affect the ability of employers to have policies prohibiting the use of marijuana by employees and prospective employees, or prevent employers from complying with state or federal law.”

What does that mean for California employers and employees? Nothing in Proposition 64 limits the ability of an employer to enforce its marijuana-related policies, including testing current and prospective employees, and/or discipline (including termination) under those policies.

In the midst of the well-publicized changes to California law early this year, another potentially significant event occurred without significant coverage and whose impact has yet to be fully realized or understood. In 2013, then U.S. Deputy Attorney General James Cole sent a memo to federal prosecutors, advising that their efforts should not be devoted to the use or sale of marijuana in states where it had been legalized. It further advised that prosecutors should leave any enforcement efforts to state and local authorities.

On January 4, 2018, three days after the commercial sale of marijuana became legal in California, Attorney General Jeff Sessions rescinded this policy and directed federal prosecutors to enforce federal law regarding marijuana, and to “follow well-established principles when pursuing prosecutions related to marijuana activities”.

While the effect of the new federal enforcement direction remains to be seen, one thing remains clear— the right of employers to maintain and enforce their policies concerning marijuana use remains intact.

Claims You Won’t Believe: Contraception as Contraband

Reproductive freedom and the right to privacy, for minors especially, can be murky territory, with laws differing from state-to-state. In fact, only 26 states and the District of Columbia currently allow minors aged 12 or older to receive contraceptive services without parental approval. But how do these rights work when there’s no parent or guardian involved? What if contraception is legally permissible for minors in a state, but another party steps in and assumes the role of the guardian in making these decisions regarding their right to reproductive health care? One Nonprofits Insurance Alliance Group member in California found out the hard way — read below for their experience.

The Claim

A California nonprofit group home for foster teens was sued by current and former residents asserting a violation of their right to privacy and a denial of their access to reproductive health care. The group home required the teens, as a matter of policy, to be abstinent in order to reside in the group home. While they had no formal policy prohibiting residents from obtaining birth control, the group home admitted taking condoms and other forms of birth control away from the teen residents and penalizing them under their privilege-earning system for possession of what they deemed contraband. The suit also alleged that access to reproductive health care appointments was restricted, and that the teens were not allowed to meet alone with their medical care provider, if requested. The teens were represented by two national, nonprofit public interest law firms that promote youth and reproductive health care rights. The lawsuit sought damages and injunctive relief, which is a court order prohibiting the group home from continuing its practices in this regard, and attorney’s fees under the Private Attorney General Act (PAGA). The suit received extensive publicity.

The lawsuit was based on a violation of the right to privacy guaranteed under Article I, Section 1 of the California Constitution, which applies to public, as well as private entities. It also alleged negligence of the nonprofit for failure to supervise, evaluate and train childcare staff to ensure that they understood the healthcare rights of foster youth as required under California regulations, which includes the right to confidentiality and access to reproductive health care. The suit also alleged failure to follow the Caregiver Resource Handbook issued by the county (which placed the teens in foster care) as it pertained to reproductive healthcare.

While the suit was founded primarily on California law, it did cite the federal case Arneth v. Gross, which determined that the right to access reproductive health care extends to minors in foster care. Under the more narrow federal right to privacy, the Arneth court found that “minors have a constitutional privacy right to practice artificial contraception absent compelling state considerations to the contrary, and this is not diminished because they are in foster care.”

Due to the risks of a large potential damage award, and negative publicity, this case was settled in mediation. While each of the five claimants received a modest settlement of $5,000, the plaintiffs sought an attorney’s fees award available under PAGA. When this issue was submitted to arbitration, the plaintiff’s attorneys were awarded a staggering $400,000.

Lessons Learned

Access to reproductive health care rights for those in residential care is highly regulated by local, state, and federal statutes, as well as the state and federal constitutions. As this claim demonstrates, impairment of those rights can be a huge risk to a nonprofit residential care provider. To avoid such a claim, nonprofits must understand the rules and laws of their jurisdiction concerning the right to reproductive health care for those in their custodial care, and adopt policies and train staff to ensure that those rights are respected and preserved.

 

Survey Says…

This content is provided courtesy of the California Association of Nonprofits (CalNonprofits).

Did you know that in California, only nonprofits can legally conduct raffles? With changes to raffle laws being proposed in nearly every legislative session, CalNonprofits’ advocacy on raffles needs to be grounded in raffle data and informed by member views. To find out more about how nonprofits hold raffles and their views on raffle policy, we conducted a survey earlier this year. More than 300 nonprofits responded and shared below are the most significant findings.
Raffles are (financially) small potatoes:

  • Nonprofit raffles typically have tickets that cost less than $10 each.
  • They sell fewer than 300 tickets.
  • Most of the prizes are obtained as donations.
  • They generally are held by smaller nonprofits. 74% of raffles are conducted by nonprofits with operating budgets of less than $2 million.
  • Raffles provide less than 5% of a nonprofit’s income.
Nonprofits are unfamiliar with California raffle regulations:

  • Only 51% of those organizations that held raffles also filed the annual Nonprofit Raffle Report form required by the State of California.
  • 38% of those surveyed described themselves as “unfamiliar” with raffle requirements.
  • A small but significant number or respondents reported giving cash prizes of more than 10% of total receipts or selling tickets on the internet, perhaps without realizing that both activities are prohibited by law.
Nonprofits want to keep raffles charitable and away from becoming gambling:

  • Respondents’ top concern: When raffles look suspicious, it gives nonprofits a bad name (78%).
  • Respondents’ second highest concern: Raffles need to stay away from being gambling (65%).
Potential changes to laws:

When asked to rank potential raffle change laws for nonprofits, these two ideas emerged as the top priorities for respondents:

  • Highest ranked selection: Requiring raffle registration only for raffles with gross receipts over a certain amount such as $5,000 (75%).
  • Second highest ranked selection: Different regulations for small and large raffles (67%).

Most people have had the experience of buying an inexpensive raffle ticket for a local nonprofit, perhaps a high school band, a women’s shelter, or a community theatre. And many of us in nonprofits have also sold raffle tickets as well. This survey provides a unique data set to inform public policy about who can hold raffles, how tickets can be sold, and what kinds of prizes can be awarded.
Here’s a summary of key California regulations about raffles:

  • In California, only nonprofit organizations can legally conduct raffles.
  • Before holding a raffle, you must file a raffle registration form.
  • You must also file an annual raffle report form that reports on the raffles your organization conducts in a given year.
  • You cannot sell raffle tickets on the internet (though you can use the internet to tell people where to buy them)
  • 90% of what the raffle takes in must be given to the nonprofit. Only 10% can be paid out in prizes. (Exception: nonprofits that are official arms of major sports league teams are allowed to hold 50/50 raffles where 50% of the proceeds can be given out in prizes and only 50% has to be used by the nonprofit.)

For those seeking more information on California regulations governing raffles, here is a link to the information page about raffles on the State Attorney General’s website: https://oag.ca.gov/charities/raffles

Bills to change raffle laws are frequently brought to the state legislature, and CaNonprofits will continue to monitor them and let the nonprofit community know when action is needed.

NIAC Loan Fund

Does your nonprofit need a cash-flow loan? If you’re a member in California, we can help.

NIAC has a small pool of funds available to make loans of up to $50,000 to members. NIAC’s long-term goal is to prove it is financially feasible to underwrite small, yet impactful, loans to the nonprofit sector. Our research suggests that the market does not offer loans at market-based interest to financially secure nonprofits. And, if loans are offered to organizations, the processing time takes up to one year! We believe that access to small loans could improve nonprofits’ ability to serve their communities and increase their overall effectiveness. We are now inviting you to join us in proving to funders, financial institutions, the government sector, and others that making small loans to credit worthy nonprofits is both financially viable and the right thing to do!

These loans have a fixed interest rate of 6 percent interest with a loan origination fee from $250 to $500 (depending on the size of the loan). The loans will have a term of up to 12 months. Review and approval of the loan is expected to take less than five weeks. If your organization could benefit from this service, please email Nloan@insurancefornonprofits.org

Find out more here.

*PLEASE NOTE THAT THIS IS AVAILABLE TO CALIFORNIA MEMBERS ONLY

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