California Independent Contractors: The Ultimate Guide
A new independent contractor ruling by the California Supreme Court is a game-changer for millions of gig workers.
By Ann Bartz
What is the difference between an employee and an independent contractor?
More and more people in California now work as independent contractors instead of employees. What is the difference?
Contractors set their own hours. They may work at home or on the road, and they don't have a boss telling them what to do and how to do it all the time. They get paid by the hour or by the project. Their jobs may be short term or long term. They may be delivery drivers, Uber or Lyft drivers, freelancers of some kind, such as writers or designers, or consultants. The term used by the media for all these independent workers is the gig economy. Employers love the gig economy – it saves them a lot of money in rights and benefits they would need to pay for if they classified their contract workers as regular employees.
Employees have a more traditional relationship with the company they work for. They come into the office or to the job site at the same time each day, work for about eight hours, and get paid a salary for about forty hours of work every week. They have a regular job with one company, and get a paid vacation allowance, often get health insurance, and have the right to take paid leave if they have a new baby or need to take care of a family member who is ill.
Some people need the freedom and flexibility of contract work. And sometimes the hourly pay for a contract job is higher than the hourly wage an employee would get for the same work. But employee status protects workers under the law. It's better in many ways to be an employee.
In California, the California labor code requires employers to pay their employees overtime, minimum wage, and for meal and rest breaks. The labor code protects employees from discrimination. It gives them the right to take Family and Medical Leave, to be paid back for business expenses, and to be covered by Social Security and health insurance.
Independent contractors in California have no right to overtime pay, no paid breaks or paid leave, no leave to take care of family members under the Family Medical Leave Act, no right to be paid back for business expenses, no health benefits, and no state disability coverage. Being an employee in California has huge benefits.
What is the financial difference between contractors and employees?
Let's look more closely at the financial differences between the two:
• Employees pay less in taxes: only the employee part of Social Security and Medicare taxes, at a rate of 7.65% (or 2.9% for amounts over the current Social Security earnings limit). Their employer pays a matching amount. Independent contractors, who have no employer, pay both the employee and employer parts – in the form of a 15.3% self-employment tax.
• Employees also pay less for benefits: Employers, especially big companies, usually pay all or part of the cost of health, life, disability, and retirement benefits for their employees. Independent contractors have to pay for their own, if it is even available.
• Independent contractors have an easier time with work-related expenses: They can write them off of their taxes as long as they are “reasonable and necessary.” Companies often repay employees directly for their work-related expenses, but employees who deduct them from their taxes may hit a limit.
What does the new California Supreme Court decision do?
If you work as an independent contractor (you file a 1099 rather than a W2 with the IRS), a new decision by the California Supreme Court on April 30th may soon make your life better. Companies that save money by classifying people who work for them as independent contractors are facing a big change in the rules about who is an employee and who is a contractor. They will now have to classify more people as employees and give them benefits, overtime, and insurance.
The California Supreme Court decision Dynamex Operations West, Inc. v. Superior Court says that workers are employees unless the employer can prove they are independent contractors. A simple ABC test is the new standard for who is a contractor and who is an employee. The ruling will force many businesses to hire people as employees instead of contractors. It will also force businesses to pay people who are now contractors as employees instead. Those employees will have rights, benefits, and protections they don't have as contractors – such as the right to overtime pay, paid leave, and health insurance. It's a big win for workers.
The decision in Dynamex Operations West, Inc. v. Superior Court protects workers in California by requiring companies to prove that people they now classify as independent contractors truly are contractors. Companies will have to prove that contractors are running their own small businesses that sell their services to other businesses – so they are not allowed to get wages and benefits as regular employees. A simple “ABC test” used in Massachusetts and New Jersey lays out new rules for who is a contractor:
• A) the company does not control how or when the worker does his or her work
• B) the worker performs work that is not the usual work of the business
• C) the worker usually performs similar work as his or her trade or business.
Remember, an employer who wants to classify you as a contractor must be able to prove that each of the above conditions applies to you. Your employer has to prove that not only are you in control of how you do your work, but also that you are doing work that is different from the usual work of the business. For instance, say you are a driver for Uber. Uber's usual work is giving people rides. If you drive for Uber, you give people rides – you are not doing work that is different from the usual work of the business. So your employer can't prove that B is true, and must classify you as an employee.
Before this decision, California businesses could say whatever they wanted about how much control they had over someone's work and hours. Businesses often classified workers to their benefit. It was up to the worker to prove that he or she should be classified as an employee and not a contractor. The test was longer and more complicated, with 10 factors such as how much a worker was supervised and whether the company could fire the worker without cause.
Now it's up to employers to prove that their workers are contractors. The burden of proof is on the employers. Companies are now more likely to hire people as employees with rights and benefits to avoid trouble with the law.
The ruling is currently under appeal.
What aspects of employment does the ruling affect?
If a business has been classifying workers as contractors that it now must classify as employees, the decision makes the employer responsible for many worker protections that independent contractors have to either cover on their own or do without. California wage orders tell businesses how much they have to pay employees as a minimum wage, how many hours an employee can work per day, and how many meal and rest breaks they must give their employees, for example.
If a worker should be classified as an employee, the hiring business now has to pay federal Social Security and payroll taxes, pay unemployment insurance taxes and state employment taxes, pay overtime to hourly workers, provide worker's compensation insurance, and comply with many state and federal statutes and regulations on the wages, hours, and working conditions of employees. The worker then has the protection of those labor laws and regulations.
Who is affected?
This decision mainly affects the thousands of people who now make up the gig economy in California – from solo entrepreneurs creating service businesses to Uber and Lyft drivers to the independent guy who delivers your packages from Amazon:
• Delivery drivers
• Uber and Lyft drivers
• IT workers
• Freelancers in general – writers, editors, designers, seamstresses, developers, data scientists and analytics specialists, engineers and architects, translators, legal and administrative professionals, customer service people, sales and marketing pros, accountants, and consultants.
Businesses that misclassify their workers may be seriously affected by this ruling. If a worker should be classified as an employee, the business he or she works for will now have to pay federal Social Security and payroll taxes, unemployment insurance taxes, and state employment taxes as well as provide worker's compensation insurance. The business will also have to comply with many laws regulating the workplace, including wage and hour and discrimination laws, among many. Business in California caught misclassifying employees as independent contractors must already pay significant penalties. They also leave themselves open to the possibility of costly tax audits by the EDD.
Does California now consider me an independent contractor or an employee?
To classify someone as an independent contractor, the court said, businesses must show that they do not control the worker's time or actions. They must prove that the worker is doing work that is outside the company's core business. And they must prove that the worker does that same work as part of "an independently established trade, occupation, or business."
You the worker now have more of a say in how you are classified, and the burden of proof is on the employer if your employer wants you to give up your employee status. The court can tell when a business is trying to get away with putting a worker in a bad position to save money. The ruling, written by Chief Justice Tani Cantil-Sakauye, says that when a worker has not decided on his or her own to set up shop as an independent business and the employer has just decided to label that worker as an independent contractor, it now will look to the courts as though the employer is trying to misclassify the worker on purpose.
An employer may deny a worker the status of employee "only if the worker is the type of traditional independent contractor – such as an independent plumber or electrician – who would not reasonably have been viewed as working in the hiring business," the court said.
Instead, an independent contractor would be seen as working "in his or her own independent business," according to the ruling. The expectation, says the ruling, is that an independent contractor would take “the usual steps to establish and promote his or her independent business.” Those usual steps, says the ruling, would include “incorporation, licensure, advertisements, routine offerings to provide the services of the independent business to the public or to a number of potential customers, and the like.”
What does this ruling mean for you?
If you run your own independent business providing services to various companies as an independent 1099 contractor, and you pay your own self-employment taxes and provide for your own health insurance and other benefits, this ruling does not change your situation.
But if your boss in some workplaces, or a main workplace, supervises you the way he or she would supervise a regular employee, and if your boss tells you how and when to perform your work, which is the main work of the business, this ruling could change your life. It makes you eligible for employee status, and gives you all the rights and benefits that regular W2 employees get. These rights and benefits can include: health insurance, paid time off, and eligibility for unemployment insurance, family medical leave, and overtime pay.
An employment attorney can advise you on next steps to take.
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