Overview of Classification Laws in California

If you work with independent contractors in California, you must stay up to date with the rapidly changing legislation. The laws are now stacked strongly against those who work as independent contractors, so avoiding employment misclassification is more important now than ever! This guide will help you understand the difference between employees and contractors, common-law employees, the Dynamex case, and what the new legislation means for EDD audits.

Employees vs Independent Contractors

An employee is someone who works for a company that controls the work they do and how it is done. As employees, they are entitled to certain rights and benefits that are the responsibility of the employer.
These benefits generally include things like overtime, payroll withholdings, unemployment insurance, paid sick leave, meal breaks, and more. An independent contractor, on the other hand, is a worker that can control how the work is performed, completes work that is not part of the usual course of the employer’s business, and regularly engages in work as an independent contractor.
If someone does not meet all three of these elements, they are classified as an employee.

What is a Common Law Employee in California?

A common-law employee in California is a worker whose employment classification can be determined by the details laid out in common law and other provisions found in the California Unemployment Insurance Code.
Simply put, a common-law employee is an individual that gets hired by a business to perform a job that is controlled by the employer. They determine where the employees work, how they do their jobs and provide the tools and training they need to complete it. Even if the employer does not exercise the right of control, the employee classification still applies as long as they have the right to do so.

The Dynamex Case

The Dynamex case was a Supreme Court Case that shaped California employment law. Before this case, the Borello test – a multifactor test used to determine if a worker was independent enough to avoid being considered an employee – was the standard.
The case went in favor of delivery drivers who were misclassified as independent contractors, which led them to be deprived of the employment protections provided by California’s wage orders.
This landmark decision created a new presumption that any worker that performs services is an employee in terms of claims relating to wage orders unless they meet a rigid 3-part test. It did not, however, specify anything regarding unemployment insurance coverage and Labor Code provisions.

AB5 and Employment Classifications Today

In September of 2019, California legislators signed a new bill into law that made it more difficult to classify many types of workers as independent contractors. Known as Assembly Bill 5, or AB5 for short, this new legislation requires the majority of “gig economy” workers to be classified as employees.
Before this, the control factor emphasized by the Dynamex case was the determining element on whether somebody was an independent contractor or an employee. AB5 Retains the control element but adds two additional factors to create the ABC test:
A - the worker is free from control and direction of the business that hired them
B - they perform work outside of the normal course of the hiring entity’s business
C - the worker is regularly engaged in independent contract work
Furthermore, AB5 requires that the Borello test be applied if the court refuses to apply this ABC test or if the statute has provided an exception.

The Impact to Audit Exposure with the EDD

Any entity that conducts business in California must report information on employee classification to the Employment Development Department – the EDD.
They are required to report information about an independent contractor within 20 days of entering into a contract valued over $600 or making payments to them totaling $600, whichever is earliest. This reporting must be completed on an annual basis.
The EDD reserves the right to complete audits to determine whether or not employment misclassification has occurred. If a worker is an employee but was instead classified as an independent contractor, the EDD will assess payroll back-taxes for every year that they were not paid. The new legislation that has passed expands the definition of an employee as well as the potential criminal liability for employment misclassification. As a result, businesses must ensure that all of their employees are appropriately classified. 
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