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Dilemma of the Month: Employees Taking on New Work for Extra Pay

Back Article Oct 28, 2019 By Suzanne Lucas

Can full-time, permanent employees do freelance work for our California-based company if that work falls outside their job description? We have an employee who does design work on the side. We need to hire a designer and would be happy to use him on a freelance basis, but he will only do it if we pay him extra for the work. He’s an exempt salaried employee, if that makes a difference.

The correct answer should be, “Your employee is an adult, you are an adult, you should be able to negotiate whatever you both find fair.” However, we all know that’s not going to be the actual answer. The answer is that it’s much more complicated.

“If he is exempt  — which you said he is  — and the new work either qualifies as exempt work or otherwise won’t destroy the exemption, doing the additional work should not create a problem,” says Ann Fromholz, a California employment attorney, who I reached out to for some clarity on this issue. “I doubt that design work meets the criteria for an administrative exemption under California law, so you need to ensure that the employee — even with the design work — still will be primarily engaged in exempt duties.

“In addition to the above, you need to ensure that he is paid correctly. You use the term ‘freelance,’ but the employer likely will run into trouble if it attempts to pay him as an independent contractor for the extra work — both because the extra work probably does not qualify under the new ABC test for independent contractors and because he already is an exempt employee of the company. The employer may increase his salary to account for the extra work. If the employee’s salary varies based upon the hours worked, or otherwise does not stay the same week to week regardless of hours worked, the employee will not qualify as exempt under the salary test.”

Whew! Let’s unpack this.

Is the work independent and advanced?

“Designer” can mean a million things. If it’s advanced work that has some independence and is well paid, it can be an exempt job, but if it’s, “Hey, draw this figure exactly,” it’s not. Fromholz said the distinction is a concern, and you should listen. It’s not that an exempt employee can’t do basic work (the CEO doesn’t lose her exemption when she puts her own files into the filing cabinet), but that the majority of his work needs to be eligible for salary exemption — even with the extra work.

Is the work long term?

You can raise his salary to include the extra work and responsibilities, but it can’t be temporary. One of the essential criteria for exemption is that an employee’s paycheck remains the same every pay period. If someone gets an extra $500 for two pay periods and then goes back to their regular salary, the Department of Labor will say this is not an exempt employee. So, that’s a problem. If the extra work is for six months or more, it might be OK (check with your own lawyer).

Why can’t he be an independent contractor?

Fromholz referred to the ABC test, issued by the California Supreme Court in its Dynamex ruling in 2018, which Jackson Lewis law firm lays out as follows:

A. The work is free from the control and direction of the company in connection with the performance of the work, both under the contract for performance of the work and in fact; 

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

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.

Because this person is already an employee of your company, it’s hard to separate it out as “free from the control and direction of the company.” The fact that he does this for others (the C portion) is helpful but may not be enough.

In other words, for an exempt employee, this is really complicated! So if I were you, I’d hire someone else. If he were nonexempt, then it would be easy to just pay him an additional per hour rate (don’t forget overtime) for the design work. You can pay a different rate for the design work, but make sure your overtime payments account for this. (And, remember, California law requires overtime at more than eight hours in a day and more than 40 hours in a week.)

All in all, what should have been a simple solution becomes a complicated legal and payroll problem. If you decide to proceed with this, sit down with your own employment lawyer to double-check everything.

Editor’s note: This column was written before the passing and signing of Assembly Bill 5, which codified into law the ABC test issued in the Dynamex ruling. 

 

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