What is an Independent Contractor after California’s new Rules?

What is an independent contractor?  Traditionally, the difference between an “independent contractor” and “employee” has been a function of the amount of control the business exercises over the worker.  The more the business controls the worker, the more likely the worker is an employee.  Thus, if the business controls a worker and how he/she performs his/her job, he/she’s an employee. To be an independent contractor the business hires the worker to perform a specific act/job/result, and thus the business cannot “control” his/her work.

Why does it matter?  A business that employs an independent contractor is not responsible for paying any employment taxes, vacation, fringe benefits, insurance, overtime, etc.  A business that hires an employee is obligated for some if not all of these extra expenses.

So how does California come into play?  Businesses that operate in the ‘gig economy” typically classify its workers as independent contractors.  Take Uber for instance.  The Uber drivers typically control their own schedule and provide their own equipment (their car).  They can also refuse work.  While Uber sets the prices and matches customers with drivers, it does not control the actual scope of their work.  They would generally be considered independent contractors due to the overall lack of control the business exercises over them.

As  a result of various lawsuits, the California Supreme Court jumped into the mix and set a new test to determine if a worker is an independent control or an employee.  This test is known as the “ABC” test to determine who qualifies as an independent contractor. All three of the following must apply:

A. The worker is free from the business’s direction and control,

B. The work is outside the business’s usual business, and

C. The worker is engaged in a customarily independent trade.

The California legislature has passed a bill containing this wording from the Supreme Court and the governor signed it into law.

For most workers, including Uber drivers, the standards in parts A and C are not terribly difficult to meet.  However, the same cannot be said for Part B.  For instance, the business for Uber is providing rides/taxi-type of services to its customers.  Thus, for Uber its drivers would no longer qualify as independent contractors as the workers are driving vehicles for renumeration- which is not outside of Uber’s usual business (in fact, it is its business).

This is for California only.  For now.  Given the size of the California market and its effects on the other 49 states, it would not be surprising if other states adopted this approach to testing a worker’s employment status.  In addition, this may also prompt the IRS, and Federal Courts, to re-examine its definitions of “independent contractor” and make changes that could have significant impacts on businesses located in other states.  This will be something we will need to keep a close eye on in the coming years as the effect of this new law comes into play.