I have been getting a lot of calls recently from clients asking for clarification about the distinction between an independent contractor and an employee.
Misclassification can be extremely costly for employers in legal fees, back wages and benefits, and penalties. In addition, you run the risk of having the IRS or Department of Labor audit your business. This can be extremely time consuming and costly.
Of course, you should always consult your employment attorney for questions about specific situations, but here are some guidelines.
Last year, based on a decision in Dynamex Operations West, Inc. v. Superior Court, the California Supreme Court adopted the “ABC Test” as a standard for determining whether workers in California should be classified as employees or independent contractors. In their decision, the Court held that workers are presumed to be employees and that it is up to the employer to prove that they should be classified as an independent contractor based on the ABC Test.
Under the ABC Test, in order to classify a worker as an independent contractor the hiring entity must establish that the worker meets EACH of the following three factors:
- The worker is free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact; AND
- The worker performs work that is outside the usual course of the hiring entity’s business; AND
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
One of the things I tell clients is that it’s essential to consider how you define your core business (B) and how does the worker assist you in that core business.
In light of this change in the way employees and independent contractors are determined, it’s a good (and timely!) idea to do an overall review of how you’ve classified your workers. Again, as a reminder, it’s important to consult with an employment attorney if you plan to audit your records and reclassify your contractors.
Please feel free to contact me at firstname.lastname@example.org if you need assistance.