Employee vs. Independent Contractor in California: Explained in Plain English
Whether you’re a business who hires workers, or a worker who gets hired by businesses, it is crucial to understand the difference between “employees” and “independent contractors”.
The penalties for picking the wrong “classification” are no joke for either side of the relationship.
In California, the law recently changed, causing a lot of confusion for both businesses and contractors. This blog post explains where things stand in the Golden State.
PART I – LABOR LAW PROTECTIONS
It’s first important to understand what type of protections labor laws give to a worker who is an “employee”. To put it in another way, from the hirer’s perspective, what obligations do labor laws put on “employers”. The protections (or obligations) can be put into two buckets:
Bucket #1: Wage and hour protections. These make sure workers earn a living wage and protect their health and safety. Includes laws that cover:
Minimum wage
Overtime pay
Meal and rest breaks
Bucket #2: Everything else. Other labor laws covers issues such as:
Tax withholdings
Unemployment insurance
Worker’s compensation
This distinction is important to understand how the new California law works.
PART II – CALIFORNIA’S NEW LAW ON INDEPENDENT CONTRACTORS
Background:
In April 2018, the California Supreme Court decided on a lawsuit that created a new law regarding independent contractors.
The lawsuit was brought on by delivery drivers who worked for a company called Dynamex. They delivered packages and letters like those you receive when you order from Amazon.
Before 2004, the delivery drivers were all classified as “employees”.
But in 2004, the company converted them all to “independent contractors”. (Translation: They lost the protections described in Part I like minimum wage and overtime pay.)
The drivers got together and sued the company saying that they were being misclassified. Two decades later, the court made its final decision which created this new law.
The New Law Called the “ABC Test”
This law essentially says that when it comes to figuring out wage and hour protections (e.g., minimum wage, overtime pay, meal breaks, etc.), it requires three factors to be met. All three factors have to be satisfied in order for a worker to be an “independent contractor”:
FACTOR 1: WORKER IS FREE FROM HIRER’S CONTROL AND DIRECTION. The worker needs to be free from control and direction by the hirer. This is nothing new from the existing law, which focuses primarily on the hirer’s control over the worker.
FACTOR 2: WORKER IS NOT ENGAGED IN THE SAME BUSINESS AS HIRER. The worker has to be performing work that is outside of the hirer’s core business. This factor will likely be the most challenging for many.
For example, a hair salon hiring a plumber to fix a leaking sink? Independent contractor. The hair salon owner is not in the business of plumbing. It doesn’t care how the plumber fixes the leak or what tools are used.
BUT a plumbing company hiring a plumber? Likely an employee. This is even if the plumber uses her own tools and works for other businesses.
Here’s another example: A seamstress who works at home making dresses for a clothing company with materials supplied by the company? Independent contractor.
FACTOR 3: CUSTOMARILY ENGAGED IN INDEPENDENT TRADE. This factor looks to see if the worker has her own independent business or is working on establishing one.
The court explained that it doesn’t necessarily mean the worker has to incorporate, get licensed, advertise, etc. On the other hand, just calling the worker an “independent contractor” and not stopping him/her from working with other is not enough to prove that the worker is taking steps to create her own business.
Here’s the most important part of all of this: the ABC TEST currently only applies to wage and hour issues. If the lawsuit is about anything else (e.g., taxation), it uses a completely different test.
PART III – THE TEST FOR ALL OTHER ISSUES
For protections or obligations other than those dealing with wage and hour (e.g., worker’s compensation), the law uses a different test to figure out if a worker is an employee vs. independent contractor.
The test is called the Common Law Test. It is what most people are familiar with when it comes to defining an “independent contractor”.
It primarily looks at how much control the hirer has over the worker. Specifically, it looks at how much control the hirer has over the means and manner in which the work is done.
But it doesn’t stop there. It also looks at menu of other factors to support whether a worker is an employee or independent contractor. These factors include:
whether the worker is engaged in a distinct occupation or business;
the kind of occupation and whether it is typically done with or without supervision;
the skills required in the particular occupation;
whether the hirer supplies the equipment, tools, and place of work;
the duration of the services;
the method of payment;
whether the work is part of the hirer’s core business; and
whether the hirer and worker believe that they are creating an employee-employer relationship.
PART IV – SUMMARY
There are essentially two definitions or tests for independent contractors in California right now:
The ABC Test is a stricter test that requires all three factors to be met. Currently, it only applies to issues dealing with wage and hour protections.
The Common Law Test focuses primarily on how much control the hirer has on the worker. This is applied for all issues other than wage and hour protections.
Even though there is a new law in town, it’s not clear yet how it will be applied. Also, some predict that California will follow other states and use the ABC Test for all issues, not just wage and hour-related ones.
Only time will tell how the law shapes up. In the meantime, whether you are the hirer or the worker in California, it’s worth being extra careful about how you classify.
For hirers, in addition to penalties and taxes, there’s always the risk of being sued by former workers. Currently, there are hundreds of lawsuits in California relating to misclassification.
For workers, you may also face penalties and taxes if it turns out you were misclassified. Also, if you are truly an employee but misclassified as an independent contractor, you are missing out on important protections under labor laws.
Disclaimer: This article is for informational and educational purposes only, it is not legal advice. It does not create an attorney-client relationship between you and Lawgood, its founders, or the author. If you need legal advice, you should hire a lawyer.
