Independent Contractor or Employee?
The rules for determining whether a person is an Independent Contractor or an Employee in the state of California have just changed. The good news is that it is easier to determine if a person is an Independent Contractor or an Employee. The bad news is the person is probably an Employee.
The new rules are called the ABC Test and it is an all-or-nothing test. For a person to be properly classified as an Independent Contractor, the company or individual paying the person must answer YES, THIS IS TRUE to ALL THREE PARTS of the ABC Test.
The ABC Test
A person can be classified as an Independent Contractor if:
- The person is free from the control and direction of the company AND
- The person performs work that is outside of the usual course of the company’s business AND
- The person is engaged in an independent business with other clients or customers
I repeat, for a person to be properly classified as an Independent Contractor, the company paying the person must answer YES, THIS IS TRUE to ALL THREE PARTS of the ABC Test.
The Implications
Any company or individual that pays people to work for them in the state of California will have to be more diligent in future. The state will assume that the person is an Employee unless the company or individual can prove otherwise. Of course, it depends on the level of state enforcement of the new rules. However, it requires companies and individuals who pay others to perform services to be more diligent in how the work arrangement is structured. Remember, the risk is with the company or individual paying for services, not with the Independent Contractor.
Recommendation
Review all your agreements with Independent Contractors and see is they pass the ABC Test. If not, think about restructuring these relationships before there is a problem. Please consult your Human Resource professional or seek legal counsel.
Bruce Raine Income Tax Services 