Independent Contractors Are Rare: Most Workers Are Employees—and Entitled to the Rights That Entails
A person working for a company is either an employee or an independent contractor. California law greatly favors classifying workers as employees. Depending on the circumstances, it is often difficult, or even impossible, to establish that someone providing services to a company is an independent contractor.
The distinction matters. Employees have more protections and rights than independent contractors, including with respect to their wages. For this reason, many employers attempt to classify their workers as independent contractors. Though being classified as an employee provides so many more protections (and generally better rights to pay), there are also some employees that attempt to be improperly classified as independent contractors. This motivation tends to be driven by the more lax requirements in reporting pay to independent contractors and the lack of tax withholdings being taken out of the independent contractor's pay.
It's Hard Out Here to be an Independent Contractor
California prefers working relationships to be governed by the employee protections in California law, and prefers that wages be more easily tracked for tax and other purposes. California accordingly does not permit employees or employers to simply agree that a worker is an independent contractor. Instead, a person may qualify, or not, as an independent contractor, based on the nature of the working relationship and the circumstances at issue.
A Streamlined Test with a Thousand Exceptions
California utilizes the 'ABC test' to determine if someone is an employee or an independent contractor (Cal. Labor Code § 2775). Usually. This issue is so politically charged, that an enormous volume of alternate rules apply to different industries and different kinds of employment. (See e.g., Cal. Labor Code § 2776-2784.) It is rare to see the effects of lobbying so clearly reflected on the face of the law, as this laudably succinct general test is riddled with exceptions. As a result, it is necessary to scour the code to determine if the employee and employer are addressing a type of work, and general industry, that is subject to some entirely different set of requirements. Summarizing those alternative rules is not practical, but a discussion of the actual ABC test is useful.
The ABC Test
The ABC test permits classification as an independent contractor if they meet three requirements, which are labeled as (A), (B), and (C) in the statutory language.
(A) The person 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) The person performs work that is outside the usual course of the hiring entity's business.
(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Each of these requirements can get complicated, but, in short, the person needs to exercise their own discretion (rather than purely mechanically performed a set task in a specified way); they need to be doing work that is not what the company normally does [i.e., a painter painting a Starbucks might be an independent contractor, because Starbucks does not offer painting services, but a barista at a Starbucks will always be an employee, because that work is inside the usual course of the hiring entity's business]; and the person needs to be working for more than one person/company. If any one of those requirements is not met, then the person is not properly an independent contractor under the ABC test, and must be paid as an employee.
Misclassification is Expensive
Misclassification can be costly. The code provides for a penalty of $5,000 to $25,000 per misclassified employee. However, the greater exposure is in the wages that would very likely be owed to the misclassified employee, who did not receive the protections of minimum wage laws, meal and rest break laws, overtime laws, and otherwise. Such exposure can make the penalty listed above appear relatively modest.
If you are an employee classified as an independent contractor or an employer trying to classify someone as an independent contractor, it is essential to review the applicable law. Consider consulting with an attorney or other professional who can provide guidance. The density of exceptions and permutations of working relationships makes what is purportedly a clear and straightforward test something rather complex.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
