Contract debate rages for antique mall tenants

A reader wrote to Antique Trader:

“I live in [California] and currently rent a space in an Antique Mall. ...The Mall’s contract states that I am an independent contractor. Now another wrinkle is happening — the State Legislature has passed Assembly AB5, which redefines who is an “Independent Contractor” in this State. I was wondering if someone in your magazine can help us as dealers clarify where we will stand after January 1, 2020, when this bill becomes law.”

The reader poses a timely concern. I’ll comment, but please note that I offer only my opinions. I’m not a lawyer. If you have concerns about your situation, speak to an attorney.

The contract between the Antique Mall’s landlord and our reader shouldn’t involve an Independent Contractor (IC) clause at all. It’s a lease. The relationship is strictly landlord-tenant, or at least it should be. Tenants pay money to landlords, not the other way around. To include an IC clause in a lease is problematic, for reasons that you shall soon see.

Landlords sometimes use dealers as a workforce. Booth operators may work the cash register, attend to maintenance, or show and rent empty spaces. From time to time, a tenant is given discounted rent in return for these services. Discounting rent in return for services is a common practice in residential real estate leasing, and not uncommon in Antique Malls.

But, can trading rent for services be accurately described as an independent contractor relationship? The intent of the California law is to address the State’s growing “gig economy” by clarifying who qualifies as an independent contractor. Other states are revising their rules about employee classification as well.

I wrote about the subject in my June 9, 2015, Behind the Gavel column titled “Slippery Slope: Employee misclassifications leading to crackdown.” Well, the crackdown has arrived. Rules have tightened, and it’s time to update this topic for our readers.

The California legislation was prompted by a State Supreme Court decision in the case of Dynamex Operations West Inc. v. Superior Court. Dynamex is a document delivery service. The court ruled in favor of the independent drivers who, although required to wear Dynamex uniforms and work according to Dynamex rules, were denied the wages and benefits required by State law. The decision is expected to impact hundreds of thousands of workers in California alone, including construction workers, truckers, warehouse workers, salespersons, janitors, and others.

In State and Federal law, a worker’s default status is “employee.” It’s up to employers to prove otherwise.

The California legislation establishes an “ABC test” to determine if a worker can be classified as an independent contractor. It’s important for Antique Dealers and Mall operators to note that having an IC agreement is not a deciding factor in California. The Court said that a worker is an independent contractor only if each of these three factors is met:

First, an independent contractor must be free from the control and direction of the hiring entity. “Who has control” is a longstanding test of IC status. If a Mall landlord requires a tenant to work specific hours or perform specific duties in a certain way, the tenant is an employee, regardless of how a contract reads.

If, on the other hand, a tenant performs duties on a self-determined schedule using his own methods, then the tenant has control. The only things a landlord can control are results: the contracted work must be done “on time” and meet quality standards.

The second condition adds a new twist: an IC must perform work that is outside the usual course of the hiring entity’s business. Continuing the example above: sweeping floors, working the register and cleaning bathrooms are not outside the usual course of business for an Antique Mall landlord. Those tasks must be done, and if a landlord wants to control the frequency and quality of such work, she should either hire an employee or contract with a cleaning company to do those jobs.

Perhaps another way for a landlord to handle the mall maintenance issue is to charge tenants for common area maintenance, as is done with other commercial properties. Then, give the dealers an option to either pay the fee or “work it off.” The matter would then be decided by the tenant.

Lastly, Independent Contractors must perform similar work for other clients. A Mall tenant who operates a janitorial service could be classified as an IC if he also does janitorial work for the Mall. A social media manager might be categorized as a contractor if she does computer work for others. An eBay listings manager could be paid “per listing” rather than hourly if he operates an online business and has other clients.

The IRS is more flexible than the State of California. They, too, employ a three-point-test, but it’s slightly different. The IRS webpage on the topic lists three requirements that an IC must meet:

Behavioral: This standard relates to the “right to control work” issue discussed above.

Financial: This “means” test applies matters like how a worker is paid and who provides tools and supplies. If a worker is paid by the hour, she is an employee. Contractors are paid by the job.

Type of Relationship: Unlike California, the IRS gives weight to the relationship between an employer and a worker: Are there written contracts? Is the work periodic or continuing? Will the relationship continue?

To quote from the IRS webpage:

“There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.”

So, if your payroll gets audited, you’d better hope that it’s done by the Feds and not California.

Which set of rules do you follow? State or Federal? The prudent approach is to follow the (stricter) California law. California leads the way in employment issues, and it won’t be long before other states fall in line. After all, there are a lot of tax dollars at stake here.