Employee Vs. Independent Contractor Part 3: Classifying Correctly
Updated: Oct 15, 2019
Our third and final article on employees versus independent contractors focuses on how to determine proper classification of a new hire. In California, there are some new recent court rulings that have further defined and constricted the hiring of independent contractors.
First we’ll talk about the guidance provided prior to the 2018 ruling. In our last article we explained that it is the relationship between the worker and the hiring entity that will determine the classification. The question to ask is if the hirer or the worker has the “right of control” of the manner and means by which the work is performed regardless of whether the business actually exercises that control. Factors to consider are:
Supervision of the work
Right to fire or resign
Part of the business’s regular trade or service
Worker operates an established business
Worker bears economic risk or benefit of his/her own business of the work performed
Employees in your business perform similar work
After a 2018 CA Supreme Court ruling on this subject, CA initiated the “ABC Test” in determining whether a worker can be considered an independent contractor. Each of the three conditions must be met in order to classify the worker as an independent contractor:
That the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
That the worker performs work that is outside the usual course of the hiring entity’s business; and
That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
Requiring that all 3 conditions be met in order to classify the hire has resulted in making it very difficult for a business to hire independent contractors in the regular course of business. Many reputable businesses have built their models under the traditional state rules and this new ruling puts their business models at risk. In these situations, both the contractor and hiring entity benefit from this relationship and little to no legal issues arise. This ruling was meant to protect hiring entities that may bend the independent contractor rules to their benefit while putting the contractor in a disadvantaged situation but under these rules, all hiring entities are affected.
As usual, each situation varies, and we always recommend that you discuss this with a qualified professional.
How or will this affect your business?