Are you being misclassified as
an independent contractor?
What is the difference?
Independent contractors
Independent contractors are in business for themselves and they determine themselves if they want to work on multiple projects at the same time and take jobs on a freelance basis. Independent contractors choose when, where, and how they perform the work. They also usually have their own tools and do marketing for their own trade. Think of it as a kitchen remodeling expert who comes to design your kitchen for you. They do one job and they are done.
Employees
Employees, on the other hand, are workers employed by a business, person, or government entity and perform the same work for that entity over and over again. In an employee-employer relationship, the employer generally exercises a control over the wages, hours, and working conditions of the employee. Think of this as a chef who works in a kitchen each day making food for the patrons of the business. The hallmark of an employee in California is that the job is part of the core function of the business.
When it comes to the workplace, there is a big distinction between independent contractors and employees. As an employee, you have certain rights and protections that are not afforded to independent contractors. For instance, if you are wrongfully terminated from your job, you may have legal recourse against your employer. However, if you are an independent contractor and your contract is terminated, you generally will not have any legal recourse.
Employees have many other legal rights that independent contractors do not. Those can include the right to overtime pay, the right to meal breaks, and the right to a minimum wage.
how do you know if you have been misclassified?
In California, there are several legal tests to determine whether a person is an employee or independent contractor. The tests are similar, but not identical. The appropriate test will depend on which rights or obligations are at issue. The most important tests are:
- The “ABC” test, which is used for most wage and hour purposes under California law;
- The “manner and means” test, which is used as a fallback under California wage and hour laws where the ABC test does not apply;
- The “control” test used by the IRS for federal tax purposes;
- The test under California’s anti-discrimination laws; and
- The “economic realities” test, which is used by federal courts.
Although each test is slightly different, the key factor in each of them is the same: the degree of control the hiring party exercises over the worker. The more control the hiring party exercises, the more likely it is that the worker will be considered an employee.
When it comes to the distinction between independent contractors and employees, there are a few key factors to consider. First, independent contractors are typically hired to perform a specific task or project, whereas employees are hired for an ongoing role within a company. Second, independent contractors are usually not entitled to the same benefits as employees, such as health insurance or paid vacation days. Finally, independent contractors typically have more control over their work schedule and can often work from home, while employees are usually required to work during set hours at the company’s office.
Because the most prominent test in California is the ABC test, we will primarily deal with that test in this article.
What is the California rule regarding the abc test when it comes to employee misclassification?
In most contexts under California law, the default presumption is that a worker is an “employee” if they provide labor or services for someone else in exchange for pay. The burden is on the hiring entity to establish that the worker is not an employee.
A hiring entity can show that a worker is an independent contractor (and thus not an employee) only if all three of the following requirements are met:
- Autonomy. The worker must be free from the control and direction of the hiring entity with regard to how the work is performed.
- Business Dissimilarity. The worker’s labor or services must fall outside the usual course of the hiring entity’s business.
- Custom of the Worker. The worker must be customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
There are, of course, exceptions to this rule, but the key takeaway is that California law construes work relationships broadly in favor of finding that a worker is an employee rather than an independent contractor.
For example, an employee who is hired to wash cars in a car wash business falls under the “B” part of the ABC test. If however, the person who washes cars is doing so for a person who rents cars, that person does not fall under the “B” part of the ABC test. People who do marketing for a marketing company would be classified as an employee, while people who do marketing for a dentist’s office will not fall under part “B” of California’s ABC test.
Keep in mind, the test is in the disjunctive. If you meet any one of the 3 criteria, the rule is that you will be considered an employee, unless proven otherwise.
What if i have an independent contract agreement with my employer?
In California, the label a business places on a worker does not determine whether the worker is an employee or an independent contractor for legal purposes. If, for example, the parties have a written agreement stating that the worker is an independent contractor but the parties act like an employer and employee, courts will ignore the agreement.
Similarly, the fact that a worker is issued a 1099 form for federal tax purposes, rather than a W-2 form, is not by itself determinative of whether a person is an independent contractor – although it may have a bearing. The legal test used to determine whether an employment relationship exists under California law is slightly different than it is for federal tax purposes.
This means that many workers who call themselves “independent contractors” are actually employees. When a worker has been misclassified, they can be entitled to recover all the benefits they would have received if they had been properly classified as an employee. This can be significant.
are there any professions that are not covered by the abc test in california?
Yes. In California there are many carveouts to the ABC test for various professional employees and other industries.
- Insurance Professionals. such as licensed insurance agents, brokers, workers providing underwriting inspections, premium audits, risk management, or loss control work for the insurance and financial service industries.
- Medical Professionals. Such as Physicians and surgeons, Dentists, Podiatrists, Psychologists, or Veterinarians.
For this exception to the ABC test to apply, two conditions must be met: (1) the worker must be licensed by the State of California to perform their work, and (2) the worker must perform professional or medical services for a “health care entity.” - Licensed Professionals. Such as Lawyers, Architects, Landscape architects, Engineers, Accountants, or Private investigators.
- Securities Workers, such as investment advisers, or agents and representatives of securities broker-dealers or investment advisors.
- Professional Service Providers.
Such as Marketers; Human resource administrators; Travel agent services; Graphic designers; Grant writers; Fine artists; Agents licensed to practice before the IRS; Payment processing agents; Photographers, photojournalists, videographers, or photo editors; Freelance writers, translators, editors, copy editors, illustrators, or newspaper cartoonists; Content contributors, advisors, producers, narrators, or cartographers for publications; Licensed estheticians, licensed electrologists, licensed manicurists, licensed barbers, or licensed cosmetologists; Specialized performers hired to teach a master class for no more than one week; Certain appraisers; and Licensed and registered professional foresters.
If a worker could potentially fall under one of these definitions it is important to carefully review the definition with a qualified Employment Law Attorney in your area to make sure you are reading the exemptions correctly. Additionally, other criteria may apply. Most of this information can be found in California Labor Code § 2750 through California Labor Code §2784.
- Licensed Contractors.
Workers who perform services that require a contractor’s license issued by the State of California are presumed to be employees. Likewise, people who work for a person who is required to obtain a contractor’s license are presumed to be employees. - Direct Salespersons.
Certain direct salespeople are subject to the “manner and means” test, instead of the ABC test. To qualify as a direct salesperson, for these purposes, the worker must meet the definition of “direct sales salesperson” under section 650 of the Unemployment Insurance Code, as well as all three conditions for exclusion that section 650 lists. - Other Relationships.
In addition to the occupations listed above, California law addresses several other types of relationships with specific rules and definitions that are applied to determine whether a worker is an employee or independent contractor.
If you have questions about how the law should be applied in a specific case, consult with an employment law attorney.
