California Labor Laws Demystified: “Summary of Differences Between Independent Contractors and Exempt Employees”

Determining the employment status of a worker can be tricky, especially when it comes to independent contractors. California law has strict standards for determining whether a worker is an independent contractor or an employee, and misclassification can result in significant penalties for employers.

We will explore the complex landscape of California law surrounding the classification of workers as independent contractors since the state has long been a pioneer in addressing worker misclassification concerns. We will explore the criteria used to determine classification, recent legislative developments, legal tests applied by the courts, and the implications of misclassification for both workers and employers.

Background

California’s classification laws have evolved over time to address the problem of worker misclassification, which can result in the denial of a variety of employment benefits and protections. Various judicial interpretations of the California Labor Code, Industrial Wage Orders, and recent legislative changes, such as the passage of California Assembly Bill 5, assist employers in determining whether a worker is an employee or an independent contractor. 

The ABC Test

California uses the ABC test to determine worker classification. Assembly Bill 5 (AB 5) codified this test in 2019 following the California Supreme Court’s landmark ruling in Dynamex Operations West, Inc. v. Superior Court (2018). It is the employer’s responsibility to establish that all three prongs of the ABC test are met in order to classify the worker as an independent contractor.

The Three Prongs of the ABC Test

In the first prong, employees are those whose employer controls the manner and means of performing the work. As part of this assessment, employers need to analyze factors such as whether they direct or control the worker’s work, provide necessary tools and equipment, and supervise the worker’s performance.

The second prong requires that the work performed by the individual is outside the employer’s usual business operations. A worker delivering things for an employer would likely be classified as an employee if that company’s primary business is food delivery.

Independent Business: The third prong mandates that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. This criterion examines whether the worker operates as a separate business entity, has a registered business, obtains required licenses, and markets their services to other potential clients.

California Assembly Bill 5 (“AB 5”)

AB 5, also known as California Assembly Bill 5, is a labor law that was enacted in September 2019. Generally speaking, it codifies the ABC test and provides a little more guidance on defining an independent contractor. The law has been controversial. Some businesses argue that the law is too burdensome and will lead to job losses. However, supporters of the law state it’s necessary to protect workers who are misclassified as independent contractors and denied basic labor protections.

AB 5 defines an independent contractor as a person who performs work that is outside of what the hiring entity does as its primary business and the job is customarily performed by an independent contractor. The law also creates a three-part test to determine whether a worker is an independent contractor or an employee. The test considers the following factors:

1. The worker’s control over the work.
2. The worker’s opportunity for profit or loss.
3. The worker’s relationship to the hiring entity.

If a worker meets all three factors, they are likely an independent contractor. However, if a worker fails to meet any one of the factors, they are likely an employee.

AB 5 has a number of implications for businesses and workers in California. For businesses, the law could lead to increased costs, as they may need to reclassify some workers as employees and provide them with benefits such as minimum wage, overtime pay, and paid sick leave. 

For workers, AB 5 could mean that they are entitled to more rights and protections as provided by California statutes and regulations. Workers who are misclassified as independent contractors may be able to sue their employers for back wages and other penalties. The law could also make it easier for workers to unionize and bargain for better wages and benefits.

Here are some additional things to keep in mind when classifying workers

Written contracts: Employers should have written contracts with all independent contractors. The contracts should clearly state the terms and conditions of the work relationship.

Independent contractor tax ID: Independent contractors must have a taxpayer identification number (TIN). The TIN can be a Social Security number or an Employer Identification Number (EIN). EINs can be obtained from the IRS website.

Wage and hour records: Employers must keep accurate wage and hour records for all employees, including independent contractors. The records should include the worker’s name, address, Social Security number or EIN, date of work, hours worked, and wages paid.

Workers’ compensation: Employers are required to provide workers’ compensation insurance for all employees, including independent contractors.

Consequences of Misclassification

Employers can suffer significant consequences if they misclassify workers. Those improperly classified as independent contractors may be denied minimum wage, overtime pay, workers’ compensation, and unemployment insurance benefits. There is a risk that employers may be sued for unpaid wages, fines, and penalties.

Conclusion

Employers should carefully consider the factors listed above when determining whether a worker is an independent contractor or an employee. If an employer misclassifies a worker as an independent contractor, the employer may be liable for back wages, penalties, and interest. Employees who believe they have been misclassified should consult with a law firm that specializes in labor and employment law, like Gateway Pacific Law Group.