The laws surrounding employee and independent contractor classification and compliance in California are complex. It’s an area fraught with risks so it’s really important that you understand the potential risks that come with bringing in additional workers before you take that leap.
How to Classify an Employee vs. an Independent Contractor
The ABC Test
This is a test to determine whether a worker should be classified as an independent contractor. Under AB 5, an individual in California is considered an employee, and not an independent contractor, unless all of the following three conditions are satisfied:
- The worker has to be free from control and direction of the hiring entity or the company in connection with the performance of the work.
- The worker performs work 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 that is involved in the work performed.
The Borello Test
If a worker is exempt from the AB 5 requirements and the ABC test that comes with AB 5, it doesn’t mean that the worker is automatically an independent contractor.
Instead the company needs to apply the Borello test to determine whether that worker should be classified as an employee or an independent contractor.
The Borello test considers factors like payment terms, the duration of the engagement, and the nature of relationship between the parties.
Job Descriptions for Independent Contractors
The job descriptions in independent contractor contracts are not a determining factor for whether a worker is considered an independent contractor or an employee.
If you’re looking for a worker who can be classified as an independent contractor, make sure you don’t have things in the job description that make it seem it’s an employee role. You have to state in the description that it’s an independent contractor role, that the benefits won’t be supplied, and that taxes are the responsibility of the worker.
Another mistake a lot of companies make is using agreements originally written for an employee and then they’re just adapting those agreements for independent contractors.
Generally, these agreements don’t transfer over very well. Many of the clauses these employee contracts require things like termination clauses, which are not relevant for independent contractors, and it goes vice versa as well.
The big takeaway for companies is that when you’re hiring an individual, generally assume that they’ll actually be classified as an employee. And then from there, you can see if they fit into the independent contractor classification based on the ABC test or the Borello test, whichever applies.
If you’re unsure, it is best to err on the side of treating them as an employee or preferably seeking legal counsel.
If you want to learn more about ICs in California, check out https://cgl-llp.com/podcasts/cgl033.
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