Whether a worker is designated as an independent contractor or employee has significant consequences both for the employer and the worker. Most of these consequences are financial; employers are not required to pay unemployment insurance, payroll taxes, health benefits, vacation time, and more. In return, ideally, the contractor has more control over their schedule, how they perform the work, and what jobs they take on.
There is little doubt that many businesses have abused this system by miscategorizing employees as independent contractors in order to save money, but efforts at reform have been contentious, especially in California. Industry groups and even some worker groups have fought against legislative changes, arguing that freelancers will lose their independence and jobs will leave the state.
Here is the current state of freelancer laws in California.
The ABC Test
The test for whether a worker should be categorized as an independent contractor or an employee as established by the California Supreme Court in Dynamex Operations West, Inc., and has since been codified and extended by the legislature in Assembly Bill 5. Under this law’s “ABC test,” a worker is presumed to be an employee unless the employer can demonstrate each of the following:
- The worker is free from the control and direction of the employer 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 all of these do not apply, then the worker should be considered an employee, not an independent contractor.
Exceptions to the ABC Test
Not surprisingly, the law also recognizes quite a few exceptions to the rule stated above. First, there are a number of professions that are exempted. These include physicians, dentists, veterinarians, lawyers, architects, accountants, commercial fishermen, and more.
Also, if the worker provides one of a number of specific “professional services,” the ABC test does not apply. However, this is only true if the worker’s situation meets a variety of requirements, such as a separate business address and the ability to control their own schedule, which serve to establish the worker’s actual independence from the employer.
The law’s exceptions are numerous, and many have their own list of unique requirements that must be individually evaluated.
In November 2020, California voters approved Proposition 22 by ballot initiative, which exempted app-based ridesharing companies from the requirements of AB 5. As a result, drivers for companies such as Uber and Lyft are not considered employees (as they would have been under AB 5), but independent contractors. In exchange, these drivers receive a few additional protections and benefits, though only while “engaged” in work for the companies.
If your business is unsure how to categorize its workers, or if you are a worker and believe you have been wrongly categorized as an independent contractor, contact Hoffman & Forde today for a consultation.