Recently, California established a new law to help define its definition of an "independent contractor" and how that differs from a full-time employee. Here’s what you need to know about California’s new “ABC” Contractor law.
While there is is no federal definition of what constitutes an independent contractor, each state has different regulations surrounding the term. Recently, California has established a new law, which narrows its definition of an independent contractor, helping to cut a clearer line between that and a full-time employee. Here’s what you need to know about California’s new “ABC” contractor law.
Employee or Independent Contractor– What’s the Difference?
Sometimes this line is blurred, and with the rise of the gig economy, this is a hard question. For instance, Uber and Lyft drivers perform work for those respective companies, but they do it on their own time with their own vehicles– so how are they categorized? Let’s look at some of the key differences between employees and contractors:
|Employment laws||Covered by a number of federal and state employment and labor laws||Mostly not covered by employment or labor laws|
|Tax Documents||Provides name, address, Social Security number, tax filing status, and number of exemptions on a W-4||Provides the name, address, Taxpayer Identification Number, and certification about backup withholding visit disclaimer page on a W-9|
|Payment||Remains the same unless formally changed. Can be paid before the arranged date of payment, but never after.||Contractor typically is paid after the job is complete and he or she sends an invoice. Contractors are not paid by payroll staff in most businesses.|
|Reporting to other agencies||Employer Reports for state and federal Unemployment Insurance||Contractor is liable for reporting.|
|Payer’s Tax Reporting Requirements||Reports all money employee received during that tax year on a W-2.||Reports on payments $600 or more in a calendar year on a form 1099|
Find the full graph here.
As you can see, contractors are different from employees in that they are not considered members of their hiring organization. Rather they are separate entities, hired to do one specific job, which is typically outside of the realm of the hiring organization. One of the defining characteristics of being a contractor has been that the individual must have control over his or her work as opposed to being under the direct leadership of the hiring organization.
However, it is tempting for companies to categorize certain types of employees as independent contractors. When this happens, the company may save money and the individuals are not covered by labor laws, they are not included in health insurance benefits, nor are they on payroll.
To keep companies from exploiting workers by mislabelling them, many states have developed their own definitions of independent contractors. Before the “ABC” contractor law, the State of California used what’s known as the “Borello” test.
A contractor takes on “The Man”
Since 1989, California has used the Borello test, which was established after an agricultural laborer (a cucumber harvester) sued the organization he worked for– S. G. Borello & Sons, Inc. The worker had been categorized as an independent contractor but claimed his role was much more similar to that of an employee’s and he should, therefore, be treated accordingly– think benefits and labor laws. Though it was a tumultuous court case, the judge ultimately ruled in favor of the agricultural worker’s.
This helped to establish the Borello test, a set of 9 factors to help determine if a worker should be classified as an employee or contractor. The main aspect is whether or not the workers truly have control over their own work— i.e. do they control their own hours? Is the work done entirely under the company’s direction or the individual’s? Some of the other factors included whether the worker or company supplied the equipment, how long the services were being performed, the payment method, etc.
Definition of the new “ABC” contractor law.
Even with that test put in place in 1989, the California Supreme Court continued looking for a more definitive system. In early May 2018, California adopted a new contractor law modeled after Massachusetts’ regulations, which has been considered the strictest in the country. This new law is referred to as the “ABC” contractor law” because of the three requirements: A, B, and C. Workers will only be legally categorized as contractors if they meet the following:
- 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;
- 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.
With this three-pronged approach, the Supreme Court is attempting to make the regulations around contractors more stringent. You’ve heard of “innocent until proven guilty,” and this is similar ideology– “employee until proven contractor.”
The main difference between Borello and the “ABC” contractor law is apparent in prong B. According to the Borello test, an independent contractor could either:
- perform work that is outside the usual course of the hiring entity’s business OR
- perform work outside all the places of business of the hiring entity.
The “ABC” contractor law eliminated that second option, performing work outside regular places, so the only way to satisfy the B prong is by truly doing work that is outside the usual course of business.
Keep these three points in mind when reviewing your list of contractors; it may just be time to make some changes.
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