Labor Laws: Contractors And California's Unique Rules Explained

California labor laws can be confusing, and the question of whether an individual is an employee or an independent contractor is a tricky one. The answer has significant implications for both workers and companies, as independent contractors and employees have different legal rights and obligations.

In California, the ABC test is used to determine whether someone is an independent contractor or an employee. This test assumes that a worker is an employee unless the hiring company can prove that the worker meets three specific criteria. These criteria relate to the level of control and direction the hiring entity has over the worker, whether the work is outside the usual course of the hiring entity's business, and whether the worker is customarily engaged in an independently established trade, occupation, or business.

The distinction between an independent contractor and an employee is important because independent contractors are not entitled to the same rights and protections under California law as employees. For example, independent contractors can be fired more easily, are not entitled to overtime pay or a minimum wage, and are not protected by federal and state anti-discrimination laws.

Given the serious consequences of misclassification, it is essential for both workers and companies to understand the criteria for determining whether someone is an independent contractor or an employee in California.

The ABC test

In California, the ABC test is used to determine whether a worker is an employee or an independent contractor. The test was first introduced by the California Supreme Court in the 2018 case Dynamex Operations West, Inc. v. Superior Court of Los Angeles and was later codified into statute under Assembly Bill 5 (AB 5) in 2020.

Part A

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 actual practice.

A worker who is subject to the type and degree of control that a business typically exercises over its employees would be considered an employee. This includes control over the precise manner or details of the work, as well as more general control over the operation as a whole.

Part B

The worker performs work that is outside the usual course of the hiring entity's business.

Contracted workers who provide services in a role comparable to that of an existing employee will likely be considered working in the usual course of the hiring entity's business.

Part C

The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

The hiring entity must prove that the worker is customarily and currently engaged in an independent business operation. This means that the independent business must already be in existence at the time the work is performed, and the worker must have taken the usual steps to establish and promote the business, such as incorporation, licensure, and advertisements.

It is important to note that simply calling someone an independent contractor or having them sign an agreement to that effect does not make them one in the legal sense. The ABC test provides a clear framework for determining the employment status of a worker, and failure to satisfy all three parts will result in the worker being classified as an employee.

Worker misclassification

In California, the ABC test is used to determine whether a worker is an employee or an independent contractor. Under the ABC test, a worker is considered an employee unless the hiring entity can prove all three of the following:

• 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.
• The worker performs work that is outside the usual course of the hiring entity's business.
• The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

If an employer fails to satisfy any of the three elements, the worker is classified as an employee.

By misclassifying workers, employers shift the financial burden of payroll taxes onto workers, and avoid paying workers' compensation and unemployment premiums. Misclassified workers lose pay, and federal and state governments lose revenue. Additionally, law-abiding employers who properly treat their workers as employees are put at a cost disadvantage relative to employers who misclassify workers.

In California, lawsuits by employees misclassified as independent contractors have increased due to the passage of AB5, a law that took effect on January 1, 2020, making it easier for workers to establish "employee" status in court and recover lost benefits and damages.

If a worker suspects they have been misclassified as an independent contractor, they may be able to file a lawsuit against their employer to recover lost wages, premiums for missed meal and rest breaks, reimbursement for work-related expenses, unpaid unemployment insurance premiums, and civil penalties.

Worker rights

• Minimum Wage and Overtime Pay: Employees are entitled to a minimum hourly wage and overtime pay for working more than 40 hours a week. Independent contractors, on the other hand, can negotiate their rates and work agreements but are not guaranteed minimum wage or overtime pay.
• Health Insurance and Benefits: Employees are often provided with health insurance, retirement benefits, and other perks, whereas independent contractors must provide their own health and business insurance and are responsible for their own retirement plans.
• Workers' Compensation: Employees are protected by workers' compensation insurance, which covers them in case of work-related injuries or illnesses. Independent contractors are not covered by this insurance and must bear the costs and risks themselves.
• Unemployment Insurance: Employees are eligible for unemployment benefits if they lose their job, while independent contractors are not.
• Anti-Discrimination Laws: Employees are protected by federal and state anti-discrimination laws, which prohibit discrimination and harassment in the workplace based on factors such as race, gender, religion, and disability. Independent contractors are not covered by these laws.
• Payroll Taxes: Employees have their payroll taxes deducted and paid by their employers. Independent contractors must handle their own payroll taxes, self-employment taxes, and other legal and financial matters.
• Work Conditions and Hours: Employees have certain protections regarding their work conditions, hours, meal breaks, and rest breaks. Independent contractors have more flexibility but also less protection in these areas.

It is important to note that misclassification of workers is a serious issue. Employers who misclassify their employees as independent contractors to avoid their legal obligations may face significant consequences, including heavy fines, lawsuits, and even jail time. Workers who believe they have been misclassified can take legal action to assert their rights and seek compensation for lost wages and benefits.

In California, the ABC Test is commonly used to determine whether a worker is an independent contractor or an employee. This test considers factors such as the level of control exerted by the hiring entity, the nature of the work performed, and whether the worker is engaged in an independently established trade.

Understanding worker rights and maintaining proper classification is crucial for both employers and workers to ensure compliance with California labor laws and to protect the rights and interests of all parties involved.

Worker compensation

Independent contractors in California are generally not covered by workers' compensation. They are responsible for obtaining their own health insurance and purchasing their own work equipment. They also pay self-employment taxes to cover social security, Medicare, additional Medicare tax, and federal income tax.

In contrast, employees are entitled to workers' compensation insurance, which must be provided by the company. Employees also receive benefits such as sick time, vacation, health insurance, and other compensation. Employers are responsible for withholding state and federal taxes from an employee's wages, ensuring employees have a safe and healthy work environment, and that they receive unemployment benefits.

Misclassification

The misclassification of employees as independent contractors is a common issue. Employers may do this to avoid their legal obligations to employees, such as providing benefits packages, workers' compensation, and disability benefits. If a worker has been misclassified, they may be entitled to compensation and unpaid wages.

Determining Worker Status

The ABC test is the primary method used in California to determine whether a worker is an independent contractor or an employee. To be considered an independent contractor, a worker must meet all three of the following conditions:

• They are free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract and in practice.
• They perform work that is outside the usual course of the hiring entity's business.
• They are customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

If a worker does not meet all three of these conditions, they are considered an employee.

Worker's Rights

Employees are entitled to a wide range of protections under federal and state law, including:

• Withholding of state and federal payroll taxes by employers
• Provision of workers' compensation insurance by employers
• Eligibility for unemployment insurance benefits from the state
• Wage and hour protections, including minimum wage and overtime pay
• Protection under federal and state anti-discrimination laws

Worker tax obligations

Independent contractors in California are responsible for their own taxes, which differ from those of employees. They must pay self-employment taxes to cover social security and Medicare, additional Medicare tax, and federal income tax. They are also responsible for their own payroll taxes and health benefits.

Businesses hiring independent contractors must determine the nature of the business relationship and comply with the federal tax code. For tax purposes, independent contractors are required to fill out an IRS Form 1099-MISC, while employees fill out a W-2 form.

The IRS uses a common law test to determine whether someone is an employee or an independent contractor, examining the degree of control and independence in the relationship. The IRS will look at:

• The extent to which the hiring entity has a right to direct and control the work, including through instructions, training, or other means.
• The financial aspects of the worker's job, including whether the worker has unreimbursed business expenses, invests in their own tools or facilities, makes their services available to the public or relevant market, and how they are paid.
• How the two parties perceive their relationship, including any written contracts that describe the nature of the relationship.

The IRS Form SS-8 can be used to request that the IRS determine whether someone should be classified as a W-2 or 1099 employee for tax purposes. This process can take up to six months.

In California, independent contractors must also comply with specific regulations governing their classification to avoid legal issues. They must pay their own payroll taxes and self-employment taxes, as well as all other direct and indirect costs of conducting business.

Frequently asked questions