What is an Independent Contractor?
In California, an independent contractor is a person who performs a service and entirely in control of the service they provide. A person who is not in control of this service is considered an employee and not an independent contractor.
It is important to accurately classify workers because of the laws and protections for California employees. Under California labor law, employees must receive overtime pay, meal and rest breaks, and minimum wage. Additionally, employees can resolve employment disputes with the Labor Commissioner’s Office while independent contractors have to resolve their own.
Workers whose companies misclassify them as an independent contractor can file for a wage and hour lawsuit.
Employees vs. Independent Contractors
In 2019, the governor of California signed Assembly Bill (AB) 5 addressing independent contractors and employees. This bill automatically classifies workers as employees unless they can pass the ‘ABC test’ and/or the ‘Borello Multifactor Test.’
The ABC Test
Under the ABC test, a worker must meet all of the following criteria in order to be considered an independent contractor:
- The worker has work outside of their schedule for the hiring entity’s company;
- The work is not controlled by the hiring entity under contract; and
- The worker is involved in an established, independent business, occupation, or trade that is related to their current work.
The Borello Multifactor Test
Some workers may be asked to take the Borello Multifactor Test instead. This test uses multiple factors to determine if a worker has the skills needed to perform certain tasks:
- The length of time a service is being performed;
- Whether the task is done under supervision;
- If the worker is engaged in the requested service; and
- If the worker hires their own employees.
If a worker believes that they have been misclassified, they can make a claim to the Internal Revenue Services (IRS).
Penalties for Misclassification
Employers will be penalized for misclassifying employees as independent contractors. Section 226.8 of the Labor Code prohibits the willful misclassification of employees as independent contractors. Willful misclassification refers to knowingly and voluntarily labeling an employee as an independent contractor. The civil penalties can range between $5,000 and $25,000 per violation.
Taxes for an Independent Contractor
The current self-employment income tax is 15.3%. Of the 15.3%, 12.4% is for Social Security and 2.9% is for Medicare. Independent contractors may also have to pay taxes outside of income and federal taxes. We recommend reserving 25-30% of their total earnings for taxes.
Frequently Asked Questions
Q: Can an employer classify their employee as an independent contractor to avoid minimum wage requirements?
A: No, an employer can not classify their employee as an independent contractor in order to pay them below minimum wage.
Q: Do all employees in California receive worker protections?
A: Yes. California Labor Laws prevent employers from restricting your rights. However, if you are considered an independent contractor, this does not apply to you. If you are unsure whether you are an employee, be sure to check with your employer.
Q: If I file a lawsuit, what are the possible damages?
A: If you are filing a lawsuit, damages can potentially include compensation for break violations, lack of overtime pay, and unpaid wages.
Q: If I make a report for misclassification as an independent contractor, can my employer fire me?
A: No, an employer can not fire you because you made a report regarding misclassification. This would be considered wrongful termination because it falls under retaliation. Wrongful termination refers to being fired for an illegal reason.
Q: When do independent contractors have to pay their taxes?
A: Workers must pay their taxes by the usual due date regardless of classification. Depending on your income, you may need to pay quarterly and annual taxes.
Contact Pride Legal
If you or a loved one has experienced worker misclassification, we invite you to contact us at Pride Legal for legal counseling or any further questions. To protect your rights, hire someone who understands them.