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Don Welker's Financial Minute

Jun 19, 2018, 3:46 PM


Determining whether a worker is an independent contractor or an employee has significant consequences. If a worker is classified as an employee you must pay payroll taxes, provide workers compensation insurance, and be in compliance with a wide variety of laws governing pay, time off and other employment-related issues. If the worker is an independent contractor they’re responsible for these things themselves. And if you misclassify an “employee” as an “independent contractor” the fines can be substantial

In the past the “independent contractor vs employee” issue was based on the amount of control that your business had over the worker, and was determined by answering a long series of questions.

Recently the California Supreme Court established a new three-part test that applies specifically to California’s Wage Orders (i.e. regulations regarding wages, breaks and more). The Court’s stated goal was to narrow independent contractor status to far fewer people. As such, under this new test many workers who are currently classified as independent contractors must be reclassified as employees.

The new “ABC” test
The new test states that a worker is considered an employee under the Wage Orders unless the employer proves that all three of the following are true:

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 such 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 the work performed for the hiring entity.

Applying the new test
How might this apply to your business? Say you run a manufacturing plant, and you sign a service contract with an HVAC (Heating, Ventilation and Air Conditioning) contractor. That contractor qualifies as an “independent contractor” because they meet all three conditions. You will not be directly supervising their work; you’re not in the HVAC business yourself, and they have their own HVAC business that also services other clients.

However, say you’re the HVAC contractor and you bring on an HVAC technician to help you during the busy summer months. That technician must be classified as an employee. Since you are in the business of providing HVAC services, the work they perform will be within the usual course of your business. Even if they work independently and have their own HVAC business, too, they will not pass criteria B.

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