Understanding the Difference Between Employees & Independent Contractors in California
Are you having difficulty understanding the difference between an employee and an independent contractor in California?
Misclassifying an employee as an independent contractor can lead to serious legal and financial consequences, which is why it’s crucial to understand the difference between the two. While both types of workers can provide services to a business, there are important differences in terms of their legal status, rights, and responsibilities. Here’s what you need to know.
The Definition of Employees
Employees are individuals who work for a business under a written or oral employment agreement or contract outlining their duties, compensation, benefits, and other conditions of employment. In California, employees are entitled to certain legal protections and benefits, including:
· Minimum wage and overtime pay
· Worker’s compensation benefits
· Unemployment insurance
· Disability insurance
· Protection from discrimination and harassment
· The right to organize and form a union
The Definition of Independent Contractors
Independent contractors are individuals who work for themselves and provide services to a business under a contract. Unlike employees, independent contractors aren’t subject to the same legal protections and benefits in California. They’re considered self-employed and are responsible for their own taxes, insurance, and business expenses. Independent contractors may be contracted by a business to perform a specific project or task, and they have more control over how they complete the work.
Determining Worker Classification in California- The ABC Test
Determining whether a worker is an employee or an independent contractor in California can be complex. According to the California labor code, there are three primary factors used to determine classification (also known as the ABC test). For a worker to be classified as an independent contractor, they must meet each of the three conditions of the ABC test.
· Part A: Control. How much control does your business have over the worker’s activities? If your business controls when, where, and how the work is performed, the worker is more likely to be considered an employee. If the worker has the autonomy to perform the work without your company’s control or direction, they’re likely considered an independent contractor.
· Part B: Nature of the work: Is the work performed an integral part of your business? If the work is essential to your company's operations, the worker is likely to be classified as an employee. Conversely, if the work performed is outside of your company's typical scope of work and is not a fundamental aspect of the business, the worker is more likely to be categorized as an independent contractor.
· Part C: Relationship: What is the relationship between your business and the worker? If the worker is dependent on your business for their livelihood, they’re more likely to be considered an employee. If the worker is usually engaged in an independent trade or business that involves the work performed, they’re likely to be considered an independent contractor.
The Borello Test
It’s also important to note that there are some situations where the ABC test doesn't apply. Prior to the codification of AB5 in 2020, the Borello test was the standard method of classifying workers in California. Unlike the ABC test, which uses three factors to determine worker classification, the Borello test uses 11 factors—and not all of the factors need to be met for a worker to be classified as an independent contractor. Certain types of workers are exempt from the ABC test and subject only to the Borello test, including:
· Physicians, surgeons, dentists, podiatrists, psychologists, and veterinarians
· Insurance brokers, underwriters, risk managers, and premium auditors
· Lawyers
· Engineers, architects, and landscape architects
· Private investigators
· Accountants
· Registered securities broker-dealers and investment advisors
· Direct sales salespeople who aren’t paid by the hour (and have written IC contracts)
· Manufactured housing salespersons
· Individuals engaged in an international exchange visitor program recognized by the U.S. Department of State
· Competition judges, including umpires and referees
However, the ABC test is used to classify the majority of workers in California.
Avoid Misclassifying Your Workers-Get Assistance from Professional HR or Tax Professionals
It’s very important for California businesses to correctly classify their workers, as misclassification can lead to legal and financial consequences. While employees are entitled to certain legal protections and benefits, independent contractors are considered self-employed and are responsible for their own taxes, insurance, and business expenses.
Although the ABC test offers guidance on how to classify your workers, there are some situations where the Borello test should be used instead. If you’re not sure how your workers should be classified, or which test to use, contact an HR specialist or tax professional. Payroll Boutique offers HR Support services that can help you determine your worker's classification. Or, once you’ve determined how your workers should be classified, Payroll Boutique can help ensure compliance with California labor laws by processing your employee’s payroll and contractor payments. Call us today at (707) 860-8510 or email us at hello@payrollboutique.com.
Please note that this article is for informational purposes only and is not intended as business or financial advice. As every client's situation is different, the views expressed in this blog may not apply to you; for specific advice regarding your business, please consult a qualified CPA.
