California’s New Worker Classification has a Long Reach, Setting Forth a Three-Part Test to Determine if Your Workers Are Contractors or Employees
Helpful reminder from the American Society of Association Executives (ASAE): California’s new worker classification has a long reach, setting forth a three-part test to determine if your workers based in the Golden State are contractors or employees.
New legislation enacted in California last year could have far-reaching impact on associations nationwide. California Assembly Bill 5 (A.B. 5), which went into effect on January 1, 2020, sets forth a three-part test for determining if a worker is an employee or an independent contractor.
To hire someone as an independent contractor, an employer must prove three things:
1. The worker is free from the employer’s control.
2. The worker is doing work that is not central to the employer’s business.
3. The worker has an independent business to do work of the same nature being performed for the employer.
If any of these three conditions is not met, then the worker must be classified as an employee (with the exception of a limited number of jobs and industries exempted under the law).
Although A.B. 5 was focused on gig economy workers like Uber and Lyft drivers, many workers and businesses will be affected, including businesses that are located in or have employees in California. Even employers in other states should take notice of this new law, as California often leads the way in employment law trends, and many other states continue to grapple with issues raised by the gig economy.
California sought to ensure proper classification of its workers for numerous reasons. California employees, as opposed to independent contractors, are entitled to an array of labor protections and benefits, including unemployment insurance, healthcare subsidies, paid parental leave, overtime pay, workers’ compensation insurance, paid rest breaks, daily overtime, and a guaranteed minimum wage of $12 per hour. Additionally, employers must pay payroll taxes on behalf of employees, while independent contractors pay their own such taxes. Clearly, classifying workers as employees is more costly than using independent contractors to perform the same functions.
Businesses that have employees in California and use freelancers or other independent contractors in the state should work with counsel to assess how they are classified. Anyone who is working as an independent contractor but does not meet the three contractor criteria will need to be reclassified as an employee. Those reclassified employees must receive the benefits they are entitled to under California law.
If reclassification is undesirable due to cost considerations, associations may want to consider relocating certain staff positions and contracted work outside of California to states with a less stringent legal standard. If a business makes no changes and continues to operate as in the past, it should prepare for a potential legal challenge to the status of any of its independent contractors. Any such decisions should be made in consultation with legal counsel.