California employers face new challenge in 2018: Contractor or employee?
This year, a new state labor law went into effect that, if not followed, could deal a severe financial blow to a small business.
Employers must now determine using a three-part test, called the ABC test, if a hired individual is an employee or an independent contractor.
The California Supreme Court adopted the law in April following its decision on Dynamex Operations West, Inc. v. Superior Court.
To list workers as independent contractors, businesses have to show they don’t control and direct the work, that the duties fall outside what the company normally does and the worker is “customarily engaged in an independently established trade, occupation or business,” the California Supreme Court said.
That independent trade also must encompass the same type of work performed for the business.
The previous standard to determine whether workers were employees or independent contractors focused primarily on whether the business controlled how the work was performed.
As an example, the court said a plumber hired by a retail store to repair a bathroom leak is not performing work that is part of the store’s usual business.
But when a bakery hires cake decorators, “the workers are part of the hiring entity’s usual business operation and the hiring business can reasonably be viewed as having suffered or permitted the workers to provide services as employees,” Chief Justice Tani Cantil-Sakauye wrote.
The state Labor Commissioner’s Office further explained: “Since different laws may be involved in a particular situation such as a termination of employment, it is possible that the same individual may be considered an employee for purposes of one law and an independent contractor under another law. Because the potential liabilities and penalties are significant if an individual is treated as an independent contractor and later found to be an employee, each working relationship should be thoroughly researched and analyzed before it is established.”
Under the ABC test, to have a worker classified as a contractor, the employer must prove the following factors:
A – Is the worker free from control and direction under the contract and in fact?
B – Does the worker perform work outside the usual course of the hiring entity?
C – Is the worker customarily engaged in an independently established trade or business?
“Penalties for misclassification are stiff,” Brenda Gilchrist, co-founder of Santa Rosa-based consulting firm The HR Matrix LLC, recently told the Business Journal. “Employers will need to examine their 1099s and ensure they meet the new criteria for California contractors.”
The Associated Press contributed to this report