What Independent Contractors Need to Know About California’s Worker Classification Law

California’s worker classification laws have undergone significant changes in recent years. These updates have reshaped how businesses use independent contractors. The state has implemented strict guidelines to differentiate between employees and contractors.

Many of the recent changes were implemented as part of Assembly Bill 5 (AB 5) which went into effect January 1, 2020, and subsequent amendments to that bill. These updates affect employers across various industries and impose stringent legal standards. Violating these provisions can result in major misclassification penalties, complex litigation, and damaged reputations.

How employees are classified affects everything from wages and benefits to tax liability and what legal protections businesses are afforded. Whether you’re an independent contractor or a leader at a company that frequently relies on ICs, it’s vital to familiarize yourself with the employment laws introduced under AB 5.

The “ABC Test” for Defining Independent Contractors and Employees

One of the biggest changes associated with California’s new employment laws in AB 5 is the “ABC test.”

This test assumes that anyone who works for and is compensated by a business is one of that entity’s employees. Organizations claiming that a worker is an independent contractor must pass the ABC test to satisfy the employment law definition of an IC.

A worker is automatically classified as an employee, not an independent contractor, unless a business meets all of the following conditions:

• The hiring entity doesn’t exercise control and direction over the worker’s performance of the agreed-upon work
• The individual performs work that isn’t part of the hiring entity’s usual course of business
• The individual customarily engages in the same occupation or independently established trade as the work they’re performing for the hiring entity

Failing to satisfy any of these three conditions automatically classifies a worker as an employee. This classification entitles them to employment benefits, such as minimum wage, overtime pay, and workers’ compensation.

Let’s say a business hires two workers. The company designs mobile applications and employs a small team of software engineers and coders.

In scenario one, the business hires a copywriter to create content for the company website and marketing campaigns.

The hiring entity doesn’t exercise control over the copywriter’s work and doesn’t include copywriting or marketing services as part of its “usual course of business.” Likewise, the copywriter regularly engages in independent content creation. The copywriter passes the ABC test and is officially considered an independent contractor.

In scenario two, the same business hires an app developer to support its in-house team. The developer regularly engages in this trade activity, which meets the third component of the ABC test.

However, the hiring entity exercises control and direction over the developer’s work. Consequently, the individual would be considered an employee under California employment law.

Exceptions and Industry-Specific Provisions

Although AB 5 established the ABC test as the primary method for determining whether a worker qualifies as an independent contractor, there are exceptions for select industries and professionals. Some of these include:

• Freelance writers, graphic designers, and photographers (provided they meet specific contract and output requirements)
• Licensed professionals, such as attorneys, doctors, and architects
• Certain business-to-business relationships that meet specific contractual and operational criteria
• Referral agencies, such as those that connect professionals in fields like home repair or tutoring

If one of these exceptions applies, businesses must use the Borello test to determine whether a worker is an independent contractor or an employee.

The Borello is a “multifactor” test because all relevant factors must be taken into account. Evaluating the status of workers who are exempt from the ABC test can be even more challenging due to the case-by-case nature of the Borello approach.

The Impacts of Worker Misclassification

Misclassifying workers can have severe repercussions for your business. If an organization is found to be in violation of California employment law due to misclassification, it may be liable for:

• Unpaid wages, including overtime and minimum wage
• Unpaid payroll taxes
• Potential fines from the California Employment Development Department
• Workers’ compensation and employment insurance contributions
• Civil penalties

A single violation could cost your business tens of thousands of dollars. Therefore, it’s critical to properly classify workers.

When in doubt, it’s wise to consult an employment law attorney for guidance. Being proactive with worker classification can protect your company’s reputation and help you sidestep serious penalties.

Best Practices for a Business That Utilizes an Independent Contractor

Independent contractors are a valuable asset — assuming they’re classified correctly. Businesses that rely on them should follow these best practices to reduce the risk of employment law violations:

• Conduct periodic audits to ensure compliance with AB 5 and relevant industry exemptions
• Use detailed contracts that clearly define the nature of the business relationship and the independence of the contractor
• Avoid exercising excessive control over independent contractors; instead, give them the freedom to determine their work methods and schedules
• Identify and apply the appropriate test (ABC vs. Borello)

Several amendments have already been made to Assembly Bill 5, with more changes likely on the way. It’s important to stay apprised of the latest legal updates and adjust your hiring processes accordingly. Always apply the ABC or Borello test when evaluating worker relationships to make sure you’re classifying them appropriately.

Responding to Allegations of Misclassification

If your organization has been accused of misclassifying a worker as an independent contractor, seek legal counsel right away. A qualified employment law attorney can provide timely guidance and help you adjust your course before the incident results in serious fines or other penalties.

If a misclassification occurs, fixing the issue before state officials intervene can help you avoid or mitigate any applicable fines. Conversely, a skilled attorney can also help you address any false allegations of misclassification and protect your company’s reputation and interests.

How ICs and Businesses Can Navigate Worker Classification Employment Laws

Independent contractors are indispensable to California businesses. Likewise, these workers depend on organizations for employment opportunities and income.

AB 5 serves to clarify the classification process via the simplified ABC test. Independent contractors and the companies that hire them should work together as they adapt to these laws and engage in mutually beneficial contractual relationships. If you have any questions about new laws or regulations as an independent contractor, contact Pearlman, Brown & Wax, LLP for legal guidance.