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California Is Changing the Future of Employment Classifications. Here’s What You Need to Know When Hiring Contingent Workers.

Posted on February 22nd, 2019 Read time: 4 minutes

California Employment Classifications

California Is Changing the Future of Employment Classifications. Here’s What You Need to Know When Hiring Contingent Workers.

By: Sara Jensen, Vice President of Business Development

Published by:

Determining how employees should be classified in California requires thorough analysis of many factors. But with the California Supreme Court Dynamex decision made in April 2018, the thorough analysis has gotten even more complicated. In this case, the court ruled that employment classification should adhere to an additional test, one that’s already favored in some other states.

According to the ruling, employers must meet three criteria to be able to classify a worker as an independent contractor. Known as the ABC test, the three criteria are “whether (A) the worker has freedom from control over how to perform the service, (B) the service is outside the business’s normal variety or workplace, and (C) the worker is engaged in an independently established role.” Because the gig economy has grown substantially in the past few years, this ruling has and will continue to have a significant impact on California workers — and the companies across the globe that employ them.

W-2s vs. 1099s

Besides the forms they file at tax time, there are other major differences between employees who receive a W-2 and independent contractors who fill out a 1099. One of the most important differences is in how taxes are paid and reported to the government. For W-2 employees, taxes are automatically withheld from their paychecks and then paid to the government from the employer. Independent contractors are responsible for calculating their own payroll taxes and submitting to the government on a quarterly basis.

Another important difference is in the amount of control they have over their work. W-2 employees are told not only how to do their jobs, but also when and where to do them. They also are provided the necessary training and supplies to do the work from their employer. Contractors, on the other hand, control how and where they do the work that they’re contracted to provide, as well as provide the necessary tools needed. Employees typically have one employer, whereas contractors have more than one client they are providing services to.

W-2 employees also have the benefit of security. Most employees are covered under the Fair Labor Standards Act, which means they must be paid at least minimum wage and overtime pay (for non-exempt workers), and they are covered by workers’ compensation if they sustain a work-related injury. Many employees also receive health coverage and other benefits such as paid time off, holiday pay, retirement, etc. Independent contractors receive no such protections or paid time off and must secure their own benefits and retirement plans.

Independent contractors, on the other hand, have the benefit of flexibility. They get to control when, where and how they work, and who they want to provide services for. This benefit is increasingly outweighing the potential lack of security for many in the gig economy.

Correct Classifications

Ensuring the proper classification of workers can be tricky because there are different tests based on what jurisdiction a company is operating in. In the case of California, Allan Zaremberg, president and CEO of the California Chamber of Commerce, is worried that certain business models that don’t lend themselves to a traditional employer-employee relationship might disappear. So what should companies that are considering using contingent or gig workers do during this time of uncertainty? HR leaders should start by carefully determining the type of worker that’s needed and do their due diligence when hiring.

When it comes to choosing the right type of worker, businesses should take note of the requirements of the position. For example, if a job entails coming to an office from 9 to 5 on weekdays and the company is instructing the worker on how to do the work, they should hire a W-2 employee. Or if a worker is performing the same core duties as a full-time W-2 employee, she will likely be classified the same way, even if she’s only working part-time.

Businesses should also make note of the scope of the business’s operations. This is the crux of the new test in the Dynamex ruling. For California-based workers, if the work performed is within normal business operations, businesses should hire W-2 employees. For example, delivery is within the normal scope of business for a pizza restaurant with a delivery service, so under the Dynamex ruling, the restaurant should hire W-2 delivery drivers rather than use independent contractors.

If a business decides that an independent contractor is the appropriate choice for a specific role, it’s important for the company to create a written contract to hold all parties accountable. When in doubt, it pays to engage a third-party compliance firm that specializes in independent contractor engagement and compliance. The firm can help vet contractors and agreements while reducing the risk of improper classifications and compliance missteps.

Even if a misclassification is an honest mistake, the consequences can include minimum wage or overtime violations and possibly meal and break violations. Throw in other penalties, interest on owed payments, and attorney’s fees for the prevailing plaintiff, and the costs add up quickly. Whether your workers are in California and the current rules are in flux or they’re elsewhere and the rules haven’t changed in ages, it’s wise to double-check to make sure you’re classifying workers properly. A quick confirmation now has the potential to save countless hours and dollars down the road.

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This guest-contributed article was written by: Sara Jensen, Vice President of Business Development at IES

Sara Jensen is vice president of business development for Innovative Employee Solutions (IES), a leading global Employer of Record in more than 150 countries that specializes in contingent workforce solutions such as outsourced payrolling, independent contractor compliance, and contractor management services. Founded in 1974, IES has grown into one of San Diego’s largest women-owned businesses and has been named one of the city’s “Best Places to Work” for 10 years in a row.

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