Who's an employee, who's a contractor? California law could change entrepreneurs' status
“California to eliminate independent contractors.”
“Don’t hire any workers from California.”
“This is going to kill small businesses.”
Headlines and commentators have been predicting doom and gloom since a new California law went into effect Jan. 1 limiting the ability of some employers to classify workers as independent contractors. You’d think no one would ever be able to hire an independent contractor ever again.
Well, don’t get your knickers in a twist. This is hardly the death knell of independent contracting. Even if your small business is thousands of miles from California, pay attention to what’s going on in that state, particularly if you’ve ever hired independent contractors or have ever been hired as an independent contractor yourself.
I am based in California. I own a small business. I have W2 employees, and I use independent contractors. I want to continue hiring both. And this law won’t stop me.
Worker-status issues have beguiled companies, workers and government agencies for as long as I’ve been in business, and what makes someone an employee versus an independent contractor is one of the most disputed areas of employment law. The rise of “gig workers” – often treated as independent contractors – has made this issue even more pressing.
Independent contractors not only do not receive benefits, such as health care or workers’ compensation, but they have no worker protections, such as protection from discrimination, minimum wage, overtime and so on.
This has led to some craven employers to intentionally mislabel workers, eliminate real jobs to turn those roles into contractor positions or even build corporations on the backs of “independent contractors” who provide the company’s essential services but have little real independent control.
California law attempts to clarify what entitles someone to be considered an independent contractor. A worker must meet all three of California’s “ABC” test:
• A. that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact,
• B. that the worker performs work that is outside the usual course of the hiring entity's business,
• C. that the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.
What does that mean? Let’s take a look at a few scenarios:
• You run a California restaurant. You hire a social media marketing consultant. They work on their own time, from their own place of business, and they have a few other clients. You’re OK.
• You run a California restaurant. You hire cooks as contractors. Some of them work for other restaurants as well. But you tell them which hours to work and set their pay. Those workers should be employees, even if they are part-time employees.
• Your restaurant is in Texas, but you hire a contractor in California to build and maintain your restaurant’s website. They negotiated their fee with you, they work for others and they do the work when they want, except you have deadlines and certain times for meetings. You’re just fine.
• You are an independent contractor in California providing janitorial services to restaurants. You’ve set the prices you charge and work for a number of restaurants. You’re OK, too.
Like all new laws, it will take a while to work out the kinks. There will be amendments and legal interpretation and legal challenges. In fact, many industries and professions have already been excluded from the law’s limitations.
But here’s what to know if you’re at all concerned:
• Will I have to stop hiring independent contractors from California? NO.
• If I’m an independent contractor in California, do I have to now become a full-time employee? NO. You don’t even have to become a part-time employee.
• If I run a business where I use independent contractors to perform key functions of my business, do I have to change? Possibly. If you control them and/or their services are core to your business, you may have to change.
• I’m an independent contractor – should I get incorporated or form an LLC? Possibly. If you’re worried about losing clients, being incorporated is a way to alleviate their concerns.
Small businesses depend on the health of the middle class. When good jobs are turned into underpaid gigs, in the long run, it’s harder to build and succeed as entrepreneurs.
Rhonda Abrams is the author of “Successful Business Plan: Secrets & Strategies,” the best-selling business plan guide of all time, just released in its seventh edition. Connect with Rhonda on Facebook, Instagram and Twitter @RhondaAbrams. Register for Rhonda’s free business tips newsletter at www.PlanningShop.com
This article originally appeared on USA TODAY: California independent contractors' law could change worker status
