Tag Archives: independent contractor

AB 2257 – New Changes to California’s AB5

QUICK BACKGROUND

California Assembly Bill 5 (AB5), went into effect on January 1, 2020 and requires companies that hire independent contractors to reclassify them as employees, with a few exceptions. The biggest question regarding AB5 was how to differentiate between an employee and a contractor. The California Supreme Court created a three-way test to help, commonly called the ABC Test:

  1. The worker can perform services free of the company’s control and/or direction.
  2. The worker performs tasks that are outside of the company’s regular activities.
  3. The worker is also engaged in an independently established trade or business.

KEY TAKEAWAYS

  • California Assembly Bill 5 (AB5) extends employee classification status to gig workers.
  • Companies must use a three-pronged test to prove workers are independent contractors, not employees.
  • AB5 is designed to regulate companies that hire gig workers in large numbers, such as Uber, Lyft, and DoorDash.
  • On Aug. 10, 2020, a California judge ruled against Uber and Lyft for failing to comply with the law.
  • And on Sept. 4, 2020, the Calif. legislature passed—and Governor Gavin Newsom signed—Assembly Bill 2257, which exempts a long list of job categories from AB5 strictures. It went into effect immediately.

Among those exempted from the strictures are still and video photographers and editors, freelance writers, content contributors, editors, translators, fine artists, and musicians. One key change was the removal of caps for categories of freelancers that had limited the number of contributions they could make to an outlet, such as a website, without having to be reclassified as employees. Not exempted: Workers for gig-economy companies such as Lyft and Uber.

As usual, navigating the constantly changing legal landscape for independent contractor status can be very complicated. If your business uses, or is thinking of using, independent contractors to assist with any business functions, make sure you contact a legal professional to make sure you are staying compliant with the latest legal developments.

Contractor or Employee? Knowing the Difference is Important

Is a worker an independent contractor or an employee? This seemingly simple question is often the contentious subject of IRS audits. As an employer, getting this wrong could cost you plenty in the way of Social Security, Medicare, and other employment-related taxes. Here is what you need to know.

The basics

As the worker. If you are a contractor and not considered an employee, you must:

  • Pay self-employment taxes (Social Security and Medicare-related taxes)
  • Make estimated federal and state tax payments
  • Handle your own benefits, insurance and bookkeeping

As the employer. You must ensure your employee versus independent contractor determination is correct. Getting this wrong in the eyes of the IRS can lead to:

  • Payment and penalties related to Social Security and Medicare taxes
  • Payment of possible overtime including penalties for a contractor reclassified as an employee
  • Legal obligation to pay for benefits

Things to consider

When the IRS re-characterizes an independent contractor as an employee, they look at the business relationship between the employer and the worker. The IRS focuses on the degree of control exercised by the employer over the work done and they assess the worker’s independence. Here are some guidelines:

  • The more the employer has the right to control the work (when, how and where the work is done), the more likely the worker is an employee
  • The more the financial relationship is controlled by the employer, the more likely the relationship will be seen as an employee and not an independent contractor To clarify this, an independent contractor should have a contract, have multiple customers, invoice the company for work done, and handle financial matters in a professional manner
  • The more businesslike the arrangement, the more likely you have an independent contractor relationship

While there are no hard-set rules, the more reasonable your basis for classification and the more consistently it is applied, the more likely an independent contractor classification will not be challenged.