Cecily Zamora
In California, the distinction between a common-law employee and an independent contractor is important for worker's rights and employer obligations, including wages, benefits, and tax responsibilities. A common-law employee is typically considered to be in a traditional employer-employee relationship, where the employer has a certain degree of control over the work performed and how it is done. This control is evaluated through tests such as the right-to-control test or the stricter ABC test, which is used in California. These tests consider factors such as behavioral and financial control, the type of relationship, and the permanence of the role. Misclassification of workers can result in penalties and lawsuits for employers.
| Characteristics | Values |
|---|---|
| Control | The employer determines the work schedule, days and hours worked, and the level of oversight. They also control the financial and business aspects of the job, including pay and reimbursements. |
| Relationship | The worker's contribution is crucial to the company's operations. They receive benefits such as health insurance, sick leave, retirement plans, and vacation pay. |
| Type of Work | The work performed is within the scope of the company's normal business activities. |
| Employment Status | The worker is classified as an employee if they are paid by the hour, week, or month. |
| Taxes | Employers must withhold and pay Medicare, Social Security taxes, and unemployment insurance on wages. |
| Legal Protections | Common law employees have more legal protections than independent contractors. |
| ABC Test | California uses a strict three-part ABC Test to determine employment status, focusing on the right to control and autonomy. |
| Borello Test | The Borello Test is a more flexible factor-based test, also used in California, considering the right to control and other factors. |
| Misclassification | Misclassifying employees as independent contractors can result in penalties, fines, and lawsuits. |
| Statutory Employees | Certain roles in California, such as officers of a corporation and artists in the movie industry, are considered statutory employees with specific protections and tax requirements. |
| Exceptions | California's worker classification law includes exceptions to the ABC Test for various industries and professions. |
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What You'll Learn
Common law employees vs independent contractors
In California, the distinction between common-law employees and independent contractors is important for determining worker rights and employer obligations, including wages, benefits, and tax responsibilities.
Common-law employees in California are those who have been classified as employees through legal tests based on California Supreme Court decisions, rather than statutes. These tests, including the Borello test and the ABC test, differentiate employees from independent contractors. The Borello test is a more flexible, factor-based test that focuses on the hiring entity's right to control the work performed, while also considering other factors. The ABC test, on the other hand, is a stricter test with three factors: the worker must be free from the control and direction of the hiring entity, the worker's work must be outside the usual course of the entity's business, and the worker must be customarily engaged in an independently established trade, occupation, or business similar to the work performed.
Common-law employees often receive benefits such as health insurance, sick leave, vacation pay, and retirement contributions. Employers must also withhold and pay for Medicare and Social Security taxes, as well as unemployment insurance, on wages paid to common-law employees. These employees are protected by various laws, including California's wage and hour laws, workplace safety laws, unemployment insurance provisions, and retaliation laws.
Independent contractors, on the other hand, typically work for multiple businesses or clients, have their own workspace, and pay for their own tools and equipment. They are generally not entitled to the same benefits as common-law employees and must resolve disputes or enforce their rights under their contracts. Employers are not required to withhold or pay certain taxes for independent contractors, and using true independent contractors can relieve employers of certain legal obligations.
It is important to note that mislabeling a worker as an independent contractor can result in liabilities and penalties for employers. If there is uncertainty about a worker's classification, California's Employment Development Department (EDD) can provide a determination.
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Common law tests
In California, common-law employees are those who have been classified as such through legal tests based on California Supreme Court decisions, rather than statutes. These tests aim to differentiate employees from independent contractors.
The IRS uses a common-law employee test to examine the degree of control in the working relationship and determine common-law employees. The test currently uses the following three categories:
- Behavioral control: The business has a right to direct and control the work and how it is done through instructions, training, or other means.
- Financial control: The business has the right to direct or control the financial and business aspects of the worker's job, including when and how much they are paid, expense reimbursements, and the tools and equipment they use.
- Type of relationship: The business provides the worker with employee-type benefits, the relationship is permanent, and the services performed by the worker are a key aspect of the company’s regular business.
The 20-factor test, also known as the "right-to-control test", is used to evaluate who controls how a person’s work is performed. While the IRS doesn't use this test in an official capacity anymore, aspects of it are still used to determine whether a worker is an independent contractor or employee.
California is one of several states that use some version of the ABC test. This test, first articulated in the 2018 California Supreme Court decision Dynamex Operations West, Inc. v. Superior Court of Los Angeles, and later codified into statute under Assembly Bill 5 in 2020, presumes a worker to be an employee unless the hiring company can prove that the worker:
- Is free from the control and direction of the hiring entity in connection with the performance of their work.
- Performs work that is outside the usual course of the hiring company's business.
- Is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
If a worker does not meet all three of these criteria, they are classified as an employee.
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Statutory employees
In California, a statutory employee is a worker whose job is classified as that of an employee by state statute. These statutes override any agreement between the worker and the company that has hired them. This means that even if the worker and the company agree that the worker will be an independent contractor, if California law classifies the worker as a statutory employee, they will be legally considered an employee.
There are only a few types of statutory employees in California. Statutory employees have more legal protections than independent contractors, but their employer must withhold certain taxes from their paychecks, including California personal income tax (PIT) in some cases. Employers may also have to match the statutory employee's contributions to these taxes to the IRS.
The following roles are considered statutory employees in California, according to the Unemployment Insurance Code:
- An officer of a corporation, other than a director
- An artist or author in the movie, radio, or television industry whose employer can control the performance of their services, whose product is work for hire, and whose collective bargaining agreement lists them as an employee
- A member of a limited liability company (LLC), other than a partnership, that is treated as a corporation for federal income tax purposes
- An unlicensed contractor performing construction work that requires a license
It is important to distinguish statutory employees from common law employees. Common law employees are California workers who have been classified as employees through legal tests based on California Supreme Court decisions rather than statutes. These common law tests, such as the ABC test and the Borello test, aim to differentiate employees from independent contractors by examining the practical realities of the employment relationship and the degree of control the employer has over the worker.
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Employee benefits
One of the key benefits that employers in California must provide is paid sick leave. Employees are entitled to a minimum of 40 hours or five days of paid sick leave annually, and employers may offer additional sick leave at their discretion. California also mandates family and medical leave through the California Family Rights Act (CFRA). This act ensures that employees who need time off for medical or family reasons can take up to 12 weeks of unpaid, job-protected leave. The CFRA covers a broader range of family members than the federal Family Medical Leave Act, including grandparents, domestic partners, siblings, and grandchildren.
Another important benefit is health insurance. While California does not require employers to offer health insurance, federal law mandates it for employers with 50 or more full-time employees. Employers in California who offer group health insurance must ensure compliance with federal and state laws, including coverage for mental health services, maternity care, and preventive care. Additionally, employers in San Francisco with 20 or more employees (50 or more for nonprofits) must adhere to the Health Care Security Ordinance (HCSO), which requires a minimum spending amount on healthcare for eligible employees.
Retirement plans are also a common benefit offered by California employers. While not mandatory, businesses often provide retirement savings options like pension plans or 401(k) plans. The state-mandated CalSavers program, which currently applies to businesses with five or more employees, will soon include those with just one employee by December 31, 2025.
California also has specific protections in place for statutory employees, who are classified as employees through legal tests rather than statutes. Statutory employees are entitled to certain benefits and legal protections, such as protection from discrimination under the California Fair Employment and Housing Act (FEHA) and minimum wage laws.
It is important for employers to stay informed about legislative changes to ensure compliance with the law and provide their employees with the benefits they are entitled to. If employees believe their rights are being violated or they have not received their entitled benefits, they can file a claim through the California Department of Industrial Relations or seek legal assistance.
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Worker classification
In California, the distinction between common-law employees and independent contractors is crucial for businesses to avoid penalties and legal consequences. Common-law employees in California are those who have been classified as employees through legal tests based on California Supreme Court decisions, rather than statutes. These tests, including the ABC test and the Borello test, evaluate the degree of control the employer has over the worker and the work performed.
The ABC test, stemming from the 2018 California Supreme Court decision Dynamex Operations West, Inc. v. Superior Court of Los Angeles, outlines three criteria that must be met for a worker to be considered an independent contractor: freedom from the hiring entity's control, work outside the usual scope of the hiring entity's business, and engagement in an independently established trade or business. If any of these criteria are not met, the worker is classified as a common-law employee.
The Borello test, derived from the California Supreme Court case S. G. Borello & Sons, Inc. v. Department of Industrial Relations, is a more flexible factor-based test. While it also focuses on the hiring entity's right to control, it considers additional factors, providing a more comprehensive evaluation of the working relationship.
To ensure compliance, employers should carefully examine the nature of their working relationships and apply the appropriate tests to determine worker classification. Misclassification of workers can result in severe penalties, fines, and legal consequences for employers, including civil penalties and misclassification lawsuits.
In summary, worker classification in California hinges on the application of legal tests, primarily the ABC test and the Borello test, which assess the level of control, independence, and nature of the working relationship. Proper classification is essential to safeguard workers' rights, ensure employer compliance, and avoid legal repercussions.
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Frequently asked questions
A common-law employee in California is a worker whom a company controls in terms of the work they perform and how they complete it. It is a traditional employer-employee relationship.
Independent contractors have a much higher level of work autonomy than common-law employees. Contractors are self-employed, manage their schedules, methods, pay rates, and deliverables, and use their own equipment. They do not receive benefits such as health insurance or retirement plans.
In California, the ABC test is used to determine whether someone is a common-law employee or an independent contractor. An individual is presumed to be an employee unless the hiring company can prove that the worker is free from the control and direction of the hiring entity in connection with the performance of the work.
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