New California Rules about Contractors and Employees
In the absence of a clear federal definition of what makes an independent contractor or full employee, each state would usually set their own regulations about how workers are classified. California workers have been classified using the old multi-factor test until recently when the Supreme Court, in its decision on the Dynamex Operations, Inc v. Superior Court announced a new standard to determine whether workers should be classified as independent contractors or employees.
On April 30, 2018, California Supreme Court announced a new contractor law known as the “ABC” contractor law. This new law modeled after Massachusetts’ regulations is three-pronged, more stringent and may as well mean you need to review your list of contractors. But before we go into this new law in details, let’s look at some of the key differences between employees and independent contractors.
Contractors and Employees: A Look at the Key Differences
Sometimes, it is somehow hard to draw a line between both terms. The rise of the current gig economy has even made this line even more blurry. Take Uber drivers for example. These people work for the company but at their own schedule and with their own vehicles. How would these people be classified? Below are a few differences between contractors and employees. This will help us understand the basic things involved when workers are classified under any of these two categories.
- While employees are covered by several state and federal employment and labor laws, contractors are usually not covered by those laws.
- For employees, you’ll be required to withhold income taxes, Social Security and Medicare taxes, pay employer unemployment taxes, etc. these do not apply to independent contractors.
- While employees are eligible to get overtime pay, disability compensation, unemployment insurance, etc, contractors are not eligible for these and do not have the right to join unions or other workplace protections and associations.
- An employee’s payment remains the same until it is changed formally. This can be paid before but not after the arranged date. The contractor is usually paid after completion of the job they’ve been hired to do. In most cases, they are not paid by the payroll staff.
Contractors are not usually considered part of the staff of the hiring organization. They are seen as separate entities hired to perform specific jobs which are usually out of the realm of the hiring entity. Contractors usually have control over their work as against being under the direct control or leadership of the organization hiring them.
Some companies are often tempted to categorize employees as independent contractors. The reason behind this often boils down to saving money. The workers in question are not included in payroll, covered by labor laws or included in health insurance benefits. States are beginning to develop their own definitions of what constitutes an independent contractor. This is done in order to prevent the exploitation of workers by misclassifying them as contractors.
Proper classification of workers is very important not only to avoid HR troubles but also to ensure you do not get slapped with avoidable financial penalties. In view of this, it is important that you get to understand what has changed with the new California independent contractor law 2018. Before now, the state of California has been using the “Borello” test, a multi-factor test to determine the classification of workers either as full employees or independent contractors.
Understanding the New California Independent “ABC” Contractor Law 2018
In its quest for a more definitive system of classification, the California Supreme Court, in early May 2018 announced a new contractor law which has been modeled after Massachusetts‘ regulations. The “ABC” contractor law is seen as the strictest nationwide and is so named because of the three A, B, and C requirements. Under the new law, workers can only be classified as contractors if they are able to meet the criteria below:
- That the worker is free from the control and direction of the hirer with the performance of the work, contractually and in fact; AND
- That the worker performs work outside the usual course of the hirer’s business; AND
- That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
To be categorized as an independent contractor in California, the hiring entity must ensure the worker meets all three criteria. Aside from ending the old multi-factor test, the new “ABC” contractor law also presumes workers in California to be employees until the hirer proves otherwise with each of the three prongs of the new “ABC” test. The ideology is similar to the popular “innocent until proven guilty” term.
California Independent Contractor Law 2018: What Has Changed?
The major difference between the new “ABC” contractor law and the old Borello test is the B prong. The old Borello test classifies an independent contractor as a worker who could either:
- Perform work outside the scope of the hirer’s business OR
- Perform work outside all the places of business of the hirer.
With the new “ABC” contractor law, that second option of performing work outside the regular place of business has been eliminated. In this case, the only way to meet the B prong criteria is by doing work which is outside the hiring entity’s usual course of business.
What California Employers Should Do Moving Forward
If you need help with complex issues like these, it will make sense to speak with experienced HR specialists. These three points of the “ABC” test must be kept in mind when the time comes to review your contractors’ list. Basically, businesses seeking to undertake their own test under the new law should endeavor to do the following:
- Evaluate current classifications
- Start a new process to guide the intake of new incoming contractors
- Conduct valuable training and education for personnel concerning proper classifications of workers for future purposes.
To avoid the headaches and problems that would normally come with the wrong classification of workers, it is important that businesses and employers draw up a sensible response and approach to the new “ABC” contractor law as it relates to classifying contractors and employees.