Last year, the California Supreme Court made it more difficult for a business to classify a service provider as an independent contractor. The question of whether an individual worker should be classified as an employee or independent contractor has considerable significance for businesses. If a worker is classified as an employee, then the employer bears the responsibility of paying Social Security and payroll taxes, unemployment insurance taxes, and state employment taxes, providing worker’s compensation insurance, and complying with the laws governing the wages, hours, and working conditions of employees.
However, if the worker is misclassified as an independent contractor, then the business is now subject to significant liabilities related to wages, penalties, and interest. For a business that wants to comply with California’s independent contractor laws and avoid significant legal exposure, the business must become familiar with the California Supreme Court’s new ABC Test.
What is the ABC Test?
In order to classify a worker as an independent contractor, the business who hires the worker must prove all three of the following things:
(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
(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 the work performed.
Step (B) is the step that changes existing law the most. In the past, the mere fact that you were doing work that was related to the type of work that the company normally does would not alone determine whether you were an employee versus an independent contractor. Now, if you’re doing work that is considered to be “within the usual course” of the hiring entity’s business, you are likely an employee, not an independent contractor. The California Supreme Court explained what step (B) means using the following examples:
- When a retail store hires an outside plumber to repair a leak in a bathroom on its premises, or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store’s usual course of business and the store would not reasonably be seen as having hired the plumber or electrician as an employee.
- On the other hand, when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will then be sold by the company, or when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes, the workers are part of the hiring entity’s usual business operation and the hiring business can reasonably be viewed as having hired them as employees.
What Does the ABC Test Mean for California Businesses?
The new ABC Test has made it harder for a business to classify individuals as independent contractors. There are currently two pending bills that will either roll back the ABC Test (Assembly Bill 71) or reaffirm that California businesses must follow the new ABC Test (Assembly Bill 5). In either event and based upon the current law, if your business hires independent contractors, then now is the time to reevaluate the classification of these workers so that your business can avoid significant legal exposure down the road.
For additional information and to learn more about how these laws may affect you and your business, please call or contact us today.