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Independent Contractors vs Employees…it’s a sticky situation.

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The new California ABC test is definitely going to challenge many businesses in California.  As a 20-year business consultant, I found it amazing that many business owners would classify their employees as 1099’s simply because their newest employee decided that was best for them.  No short test or long test was done, just simply, it would be easier for both parties. 

When Senate Bill 459 was signed into law by Governor Brown in September of 2011 businesses started to take notice.  The fines for misclassifying employees went up and liability for employers also went up.  But with the recent Dynamex ruling via the Supreme Court of California, things have really changed.  The newest ruling provides some significant clarification that needs to be applied in any business in California. 

So what’s changed?  The new ABC test and these are the new parameters…A hiring entity classifying an individual as an independent contractor now bears the burden of establishing that such a classification is proper under the “ABC test.” To do so, the entity must prove each of the following three factors:

  1. 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;
  2. That the worker performs work that is outside the usual course of the hiring entity’s business; and
  3. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. 

There you go, it’s as clear as day right?  Black and white, just like California intended it to be.  Well, not exactly.  The safest route will always be to classify the individual as a W-2 employee, put them on payroll, and pay those taxes.  I have met with so many businesses who had 1099’s who ultimately end up truly being W-2 employees.  How did my they find out they were misclassified?  When that 1099 couldn’t pay their year end taxes and the IRS auditor said, “do you think you should have been an employee?” and the 1099 contractor says “YES.”  Guess who’s knocking at your door then?  The IRS and the other government agencies who want their money because someone is paying those taxes.

Want some help with the never-ending California labor law mandates?  Me and my partners at bizhaven can help. 

Written by Glen Drouin, Co-Founder and COO of bizhaven, LLC.  Glen has 13 years experience working with his Father’s business and 20 years experience as an HR and business consultant. You can reach Glen at [email protected]  

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