In any business, it’s important to understand the distinction between contractors and employees. Though both types of workers perform services, there are different legal ramifications to how you classify them. For example:
- Contractors are not subject to the labor code, which imposes a minimum wage, overtime pay, and other legal protections.
- Contractors are not eligible to collect unemployment or disability insurance on the basis of their contract work.
- Employers are required to pay payroll taxes to the EDD (Employment Development Department) each time they run payroll for employees. When an employer misclassify workers, the employer is still liable to pay payroll taxes and may be subject to an audit.
If you’re wondering what the difference is between contractor versus employee designation, here’s how to determine it:
First, in California, all workers are presumed to be employees and not contractors. This is true even if the employer and the worker agreed and signed a contract designating the worker as a contractor. The state effectively intervenes and says you cannot designate people as contractors, even with mutual consent. It is the burden of the employer to rebut the presumption that its workers are employees by either showing a statutory exemption (which we will address in a separate article) or by successfully applying all three parts of the ABC test.
The ABC Test
The ABC test is a legal test that many states, including California, use to determine if a worker is an employee or contractor. Under the test, a worker is an employee and not an independent contractor unless the employer satisfies all three of these conditions:
- The worker is free from the control and direction of the employer in connection with the performance of the work task.
- The worker performs work and job tasks outside the employer’s business.
- The worker is a part of an independently established trade, occupation, or business of the same nature that’s involved in the work tasks performed.
Is the worker free from the control and direction of the employer in connection with the performance of the work task? A worker who is subject to a degree of control that a business typically exercises over employees would be classified as an employee. When an employer has an arrangement with the worker and there’s no need for control over the manner and details of the work tasks, the worker is a contractor.
Does the worker perform work and job tasks outside the employer’s business? A worker who provides a service in a comparable role to that of existing employees will likely classify as an employee. In comparison, an independent contractor will perform job tasks outside the employer’s usual course of business.
Is the worker a part of an independently established trade, occupation, or business of the same nature that’s involved in the work tasks they performed? The employer must prove that the independent business operation exists at the time the work is performed. An individual who made the decision to go into business will establish and promote their services. Essentially, an employer cannot assign a worker with the label “independent contractor” unless it’s true.
It’s essential for businesses to classify contractors and employees. Though both types of workers perform job tasks, employers expect different things of them. With the help of the ABC test, employers can properly classify these workers. If you’re still wondering what the difference is, always refer to our guide on contractor versus employee designation.
And if you’re a California business-owner who’s run into work classification troubles with the IRS, consider hiring an EDD attorney in Los Angeles. Pershing Square Law has experienced attorneys who can help you. If you have any questions, contact us today.