The Rights and Benefits of Being an Employee v. Being an Independent Contractor Obviously, the first question anyone has about being properly classified is, who cares? In many ways, being an independent contractor sounds like the best of all worlds - you get to work independently, while also guaranteeing regular work. And a number of businesses like to advertise the freedom of being your own boss.
But let's face it, corporations are in the business of making money. They do this in two ways - first, they get customers to pay them for goods and services, and second, they keep costs low. And for a corporation, the costs of hiring an independent contractor are much lower than that of an employee.
First, it all starts with taxes. All employers in the United States are required to pay payroll taxes - money that goes into Social Security and Medicare - in the rate of 7.65% for each employee. Employees also pay their portion of the payroll tax, which is also up to 7.65% of their pay. Independent contractors, meanwhile, are not subject to withholding, because they have to pay the entire payroll tax, 15.3%, out of their own pocket. That means that come April 15, most independent contractors end up with a tax bill instead of a tax refund.
Second, being an employee in California means that you are given all sorts of protections that independent contractors do not. For instance, under California law, employees have to be paid for all hours they work, even if they are normally paid on a piece-rate basis (that is, a specific amount per job performed). Employees are also able to get breaks, entitled to be paid within a specific time frame, have to be paid in a way that insures they can turn their pay into cash upon demand, and have a right to three days of sick leave. Independent contractors, meanwhile, have no protections under the law. Their working conditions are governed entirely by the contract, which in most cases is written by the employer.
Worst of all, independent contractors are not protected by California's laws regarding expense reimbursement and unlawful deductions. Employees, under California law, must be reimbursed for all of their necessary and reasonable business expenses during their employment. Further, employees are indemnified by their employers - protected from lawsuits by outside parties - under California law. And employees' pay is sacrosanct under California law - it cannot be subject to any deductions by the employer for breakage, or lost customers, or whatnot. Independent contractors, meanwhile, have deductions taken from their pay all the time. Again, the baseline law for independent contractors is that there is no law - everything is governed by the contract. The ABC Test California employment law is a bit odd in that it comes from two different sources - the California Labor Code and the orders of the Industrial Wage Commission. The Industrial Wage Commission was a body that existed until 2001, and would publish wage orders for different industries every year. Now, for the most part, these two sources of law match up perfectly. The Industrial Wage Commission cannot change the Labor Code, and so it typically incorporated the Labor Code into its wage orders.
But there is one area where the Labor Code and the Wage Order differ - what it means to be an employee. Specifically, the Labor Code does not define what it means to be an employee, whereas the Wage Orders do. Regardless of industry, the Wage Orders define to be employed as, "to engage, suffer, or permit to work." The California Supreme Court's most recent decision in Dynamex Operations West v. Superior Court (2018) 4 Cal.5th 903, defines what that means as far as independent contractors go. Simply put, the employer has to prove that the independent contractor:
(A) that the worker is free from the control and direction of the hirer in connection with the performance of 917*917 the work, both under the contract for the performance of such work and in fact;
(B) that the worker performs work that is outside the usual course of the hiring entity's business; and
(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
As you can tell, that's a pretty strict standard, particularly B of the ABC test. However, again, this is only for claims under the Wage Order, which would include minimum wages (being paid for all hours worked), overtime compensation, meal periods, rest periods, wage statements, reporting time pay, and certain deductions from pay for things like employer provided meals and lodging. Other employee protections are governed by a different test because these protections are not incorporated into the Wage Orders. The Borello Test Now, as stated above, the ABC test deals primarily with the Wage Order, which has a specific definition of employment. Unfortunately for clarity sake, the Labor Code itself does not define the term employment. In that absence of statutory law, Courts have turned to the common law to determine what constitutes an employee versus an independent contractor. This lead to the California Supreme Court's decision in S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341, where the Court incorporated federal law into California law. And so, the Court created the "economic realities" test, which is as follows:
1. Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
2. Whether or not the work is a part of the regular business of the principal or alleged employer;
3. Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
4. The alleged employee's investment in the equipment or materials required by his or her task or his or her employment of helpers;
5. Whether the service rendered requires a special skill;
6. The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
7. The alleged employee's opportunity for profit or loss depending on his or her managerial skill;
8. The length of time for which the services are to be performed;
9. The degree of permanence of the working relationship;
10. The method of payment, whether by time or by the job; and
11. Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.
As you can see, this test is a bit more flexible than the ABC test. Whereas a painter working for a painting company is considered to be absolutely an employee under the ABC test, under the economic realities test, that's just the very start of the analysis. And as a result, its possible for someone to be an employee under the ABC test, thus having access to meal periods, rest periods, minimum wages, overtime, etc., while also being an independent contractor under the economic realities test, and be denied reimbursement of business expenses on that basis.
If that sounds confusing, that's because it is. The Dynamex decision was groundbreaking, and it will take awhile for body of law to catch up. Already the California Legislature has indicated that it is considering changing the California Labor Code to either codify the ABC test for all provisions of the Labor Code, or to dismantle it entirely. So, What Should I Do? If, having read this legal guide, you think that you have been misclassified as an independent contractor, your best bet is to contact an employment attorney as soon as possible. Here, you have a number of good options to find one. First, you can use Avvo to find an attorney. Second, you can look up attorneys close to you at the website of the California Employment Lawyers Association, www.cela.org, and use the "find a lawyer" function on that site.
One thing to keep in mind is that in some cases, your statute of limitations can be quite brief for claims in this area - just one year. So, if you want to pursue these claims, you need to contact an employment attorney sooner than later.