Employee or Independent Contractor in 2018?

In 2018, the California Supreme Court decided a landmark case[1] on employee/independent contractor classification based on California's Industrial Welfare Commission (IWC) wage order guidelines. Their decision is much more far reaching than the prior “Borello”[2] multi-factor test used to determine worker classification in California. The Court presented a new three-part test called the ABC test to determine classification of independent contractors. Your worker may be presumptively an employee unless each of the A, B and C parts of the test noted below are met. They are; A) 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 the work and in fact, B) The worker performs work that is outside the usual course of the hiring entity’s business and C) The worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed. SO WHAT DOES THIS MEAN? Part A of the test regarding control and direction, has been a test used for several years. A worker who is subject to the type and degree of control a business typically exercises over an employee is an employee under the common law test. Parts B and C of the test are going to be more difficult hurdles to clear for California employers, and here’s why; Part B of the test defines all workers as employees who provide services comparable to that of an employee rather than to that of a “traditional independent contractor”. Here’s an example, provided by the Court, of a “traditional independent contractor”; a retail store hires an outside electrician to install a new electrical line. The electrician provides services that are not part of the store’s usual course of business and the electrician does not provide services to the retailer as an employee.[3] The electrician is a “traditional independent contractor”. Part C of the test defines an independent contractor as an individual who “generally takes steps to establish and promote his or her independent business; for example, through incorporation, licensure, advertisements, routine offerings to provide the services of the independent business to the public or to a number of potential customers…”[4] Note that there are job classifications that could be exempt from this potential re-classification to employee from independent contractor. The IWC's wage order #4 provides a list of job classifications that are exempt from the wage order. Some professional, technical, clerical and other occupations are listed within wage order #4. Also, the Court decision is still new so we don't yet know how far reaching the effects of this will be. You should contact an attorney if you have any concerns regarding potential re-classification of your independent contractors. I can assist you with payroll, tax services and bookkeeping in case you need to make any changes or updates to your business. Maureen Thielen, EA, MST helps San Diego individuals and businesses with tax services, payroll and bookkeeping services. You can reach her at (760) 828-7931 or Maureen@mteataxaccounting.com . Her office is located at 1241 Carlsbad Village Drive, Suite B2, Carlsbad, CA 92008. Maureen Thielen, EA, MST