Freelancers and independent contractors throughout the world take satisfaction in having a wide range of career options. This kind of employment suits self-reliant free spirits well, from being able to choose each assignment to choose their own hours.
However, each narrative has two sides - it's not all coffee shops, lazy Mondays, and fun and games. With flexibility comes some responsibilities that are particular to gig economy employees. Working independence also implies that employees must handle legal issues on their own, such as taxes, rights, benefits, insurance, and other problems that would normally be handled by the company's human resources department.
Employers who often operate with independent contractors, on the other hand, face more serious risks and legal concerns. Employee misclassification and (unintentional) independent contractor California taxes evasion accusations have substantial implications, including cash fines and high-interest penalties, and temporary shutdowns.
Whether you're an employer or a worker - if you live in California, this essay will solve all of your problems. We've listed all of the important regulations that govern independent contractor California and discussed how they affect both businesses and employees.
In the following article, we will discuss:
- How do you define Independent Contractor in California? (California Labor Code).
- The Assembly Bill 5 and the ABC Test
- The Borello Test
- AB5 Exemptions — 2020 update
- Not sure about the worker’s status? Try Form SS-8
- With Skuad, worker misclassification issues are not an option
There's a lot to cover, so let's get started!
What is an Independent Contractor in California?
According to California's contractor legislation, an independent contractor is a person or firm who performs a specified service for another company in exchange for payment. It also states that the independent contractor is held accountable for results rather than how the work is completed.
As a result, independent contractors are truly autonomous, with the authority to determine when to terminate the contract and with whom they will work. They can hold as many clients as they can manage at the same time. Independent contractors are likewise entitled to keep all profits generated by their own firm.
According to federal legislation in the United States, three characteristics decide whether a worker should be designated as an independent contractor:
- Type of relationship – are the workers recruited for specific projects and time frames (IC), or are they engaged indefinitely and provide critical work for the company (employee)
- Behavioral control – who has the authority to direct how work is carried out
- Financial control – who manages the firm, invests in equipment and sets the rates
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California Independent Contractor vs Employee
There are several distinctions between independent contractors and employees. Employees and independent contractors may do similar tasks, but their relationships with the organization are significantly different.
- No management control
The key distinction is that an independent contractor has the right to be his or her own boss rather than having the employer dictate how, where, and when they provide their work.
Employees are entitled to benefits, tax withholdings, and employee protections such as workers' compensation, but independent contractors are not.
- Obey All Applicable Rules
While each state has its own set of criteria for determining an employee's status, Assembly Bill 5 (AB 5) in California includes particular tests that firms must undertake when it comes to employee categorization. AB is largely motivated by a landslide court ruling and attempts to prevent workers from shady firms from abusing independent contractor status.
The Assembly Bill 5 and the ABC Test
Effective January 1, 2020, Assembly Bill 5 (AB 5) requires the strict "ABC test" to be used to determine whether a worker is an employee or an independent contractor (IC) for most California employment law purposes, including wage and hour laws, unemployment According to the independent contractor ABC test California, a worker is an IC if he or she satisfies all of the following requirements:
- The worker is free from the hiring entity's control and direction in connection with the execution of the task, both under the contract and in actuality.
- The worker does work that is not normally performed by the hiring organization.
- The worker is normally engaged in an independently established trade, activity, or business of the same character as the task done.
Notably, due to the adoption of Proposition 22, the ABC test is no longer used to categorize certain gig workers (discussed above). AB 5 also includes several exclusions for physicians, attorneys, accountants, insurance agents, and others.
The Borello Test
Prior to the ABC exam, the Borello test had been used in California for over 30 years. Sarchet recalled that in 2018, the California Supreme Court rejected the Borello test in favor of a new ABC approach for determining independent contractor status.
This test is still in use, and it is utilized when Assembly Bill 5 and the more stringent ABC Test cannot be employed, or where statutory exclusions apply.
It is also known as the "right to control" test since it determines whether the employer controls the means and manner of employment. If the employer has the authority to govern the worker, the worker must be categorized as an employee.
The Borello test consists of several criteria, all of which are given here.
AB5 Exemptions — 2020 update
California Governor Gavin Newsom signed the revisions to AB 5 with immediate effect in September 2020. These modifications enlarged the number of occupations and services that require the Borello exam rather than the ABC test.
- Exempt vocations include numerous types of artists (musicians, visual artists, performance artists, and so on), translators, CA licensed veterinarians, attorneys, architects, dentists, doctors, and surgeons.
- Exemptions for Professional Services include freelance writers and photographers, graphic designers, some travel agencies, stock broker-dealers, human resource administrators, and others.
- Exemptions for business-to-business transactions – genuine B2B transactions that fulfill specified criteria
The complete list of exemptions may be seen here.
Still unsure about the worker’s status? Try Form SS-8
Even after completing the IRS 20 Factor Test, it may be difficult to ascertain the right employment status in some circumstances. Employers who cannot avoid employee misclassification of employees as independent contractors California charges on their own have two options:
- contacting a law firm with labor law expertise and relying on their recommendations
- submitting Form SS-8 to the IRS
Both employers and employees can file this form with the IRS so that the Service can establish the worker's status.
Form SS-8 asks you to explain the concrete scenario in detail; you cannot describe a hypothetical situation, just the one that is happening right now. This is complicated since submitting Form SS-8 still requires you to file an income tax return on time.
You can check for the official instructions here.
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