In recent years, it has become more and more common for employers to hire workers and classify them as independent contractors rather than employees. One study shows that as much as 20 percent of the U.S. workforce is now classified as independent contractors.
What is the difference between an independent contractor and an employee? In very general terms, it has to do with whether or not the entity paying for service has the right to control where and how the work is done (usually an employment relationship) or whether the person doing the work has decided to go into business for him- or herself (usually an independent contractor relationship).
Why the Correct Classification Can Be Tricky to Define
Determining the status of employee versus independent contractor can be difficult because of the wide range of definitions, criteria, and factors that federal and state agencies apply. The Internal Revenue Service, for example, classifies status differently than state law. In addition, California courts would then apply an even different set of standards.
There was recently a landmark decision in which the California Supreme Court announced a new test that would help correctly classify a worker as an employee or an independent contractor, which has now been codified into law as of January 1, 2020. Known as an “ABC test,” under it, a worker could be classified as an independent contractor only if:
- The company does not control or direct the worker while the worker is performing the job.
- The worker’s tasks are different or distinct from the company’s usual way of operating the business.
- The worker has his or her own business that is separate from the company for which the work is being performed.
If all three parts of this test are satisfied, only then can the worker be properly classified as an independent contractor. If all three parts of this test are not satisfied, the worker is an employee and subject to all protections and benefits employers must provide to employees.
Why the Correct Classification Is Important
The proper classification of a worker is crucial for both the worker and the employer: If the worker is an employee, the employer is required to provide certain benefits and protections to that worker. If the worker is an independent contractor, there may be tax consequences for the worker of which he or she should be aware.
Under both federal and state law, California employers have obligations to workers who are classified as employees, including requirements for nondiscrimination, nonretaliation, minimum wage, taxes and insurance (such as social security, unemployment, and worker’s compensation), minimum safety requirements, overtime pay, and breaks for meals and rest.
Independent contractors are usually not entitled to these same protections. Independent contractors are responsible for their own costs of doing business, including payroll and self-employment taxes.
Employers that are looking to save money on the costs and liabilities of being an employer might be motivated to incorrectly classify employees as independent contractors.
It isn’t only the worker who is impacted by this misclassification. The state loses millions—perhaps billions—in payroll taxes each year when workers are incorrectly classified as independent contractors.
Do You Believe You Are Incorrectly Being Classified as an Independent Contractor?
Contact Heit Law Group if you believe you should have the status and protections of an employee versus an independent contractor. Every legal situation is different, but we can deliver real solutions for you. Call (310) 744-5227, email us, or complete our contact form. We never charge for your initial consultation and everything you say will always remain completely confidential, so you never have to worry about anyone knowing you spoke to an attorney.