California has some of the most restrictive laws on independent contractor classification in the United States. Over the past two years, new legislation has passed to restrict the classification of California workers as independent contractors. This has come largely in response to the growth of the gig economy and app-based companies such as Uber, Lyft, and DoorDash.
The shift towards the gig economy has benefited workers and businesses. However, navigating it can be tricky for small businesses, especially in California. The new legislation has caused concern for many California small business owners. Here is what you need to know if you’re thinking of using independent contractors in California:
What is an Independent Contractor?
An independent contractor is a self-employed person contracted to perform work or provide services to a business. Independent contractors pay their own payroll taxes and are not classified as employees of the business. They are contracted to provide a specific final work product or result, but the business does not control how the services will be performed.
Why Should Small Businesses Use Independent Contractors?
Independent contractors are great for small businesses. Most small businesses maintain a relatively lean staff. Using independent contractors is a great way to supplement that staff as needed without committing to hiring a permanent team member. An example of this would be hiring a contractor to help create some marketing materials for your business. A small business may not have someone on staff with the right graphic design and copywriting skills for the project, but they likely don’t need these skills often enough to justify hiring an employee.
There are also cost-saving benefits to using independent contractors. Businesses do not have to pay payroll taxes on independent contractors. Independent contractors are also generally exempt from most benefits and employment protections.
Who Can Be Classified As An Independent Contractor in California?
A key piece of contractor law in California is AB 5. The bill was signed into law in 2019 and went into effect in California in January 2020. It provided limitations and guidelines on classifying workers as independent contractors.
AB 5 established the ABC test for determining how to classify a worker. The ABC test states that a worker is considered an employee and not an independent contractor, unless all three of these conditions are met:
- The worker has freedom and control over how the work is performed. This often means that contractors will perform the work from their homes or personal offices without work hours set by the business hiring them. They also frequently retain control over the specific tools and processes used to perform the work/
- The worker is performing work that is outside the normal scope of the hiring entity’s business. You may not hire an independent contractor to perform work that has traditionally been done by an employee of the business.
- The worker is regularly engaging in independent trade or business similar to the work that they will be performing for you.
AB 2257 amended AB 5 in 2020. It provided expanded exemptions to AB 5 for workers in specific industries. Prop 22 also passed in the November 2020 election, and provided exemptions for app-based companies. However, some extended employee protections and benefits were extended to app-based contractors under the law.
Are There Penalties for Misclassifying Someone As an Independent Contractor?
Yes, there are penalties for misclassifying workers in California. Businesses may incur penalties for wage violations associated with a worker being misclassified. The California Labor Commissioner’s Office oversees these wage claims and misclassification hearings.
There are also civil penalties for willful misclassification of workers. Labor Code section 226.8, provides civil penalties of between $5,000 and $25,000 per violation. To meet the standard of willful misclassification, you must have voluntarily and knowingly misclassified an employee as an independent contractor.
These penalties can certainly add up, especially to small businesses that are already struggling due to Covid-19. While companies like Uber and Lyft have spent millions fighting AB 5 and successfully campaigning for Prop 22, small businesses lack the resources to defend themselves against lawsuits or wage claims. If you are in doubt about whether you should be classifying a worker as an independent contractor, consult an employment attorney. It’s better to invest a small amount up front than to misclassify a worker and face a bigger fight down the road.
This article is intended to convey generally useful information only and does not constitute legal advice. Any opinions expressed are solely those of the author, not LawChamps.
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