Employees vs. Independent Contractors in California Employment Law
Updated: Jun 5
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Employees and independent contractors are the two major groups of jobs in California. The way a worker is categorized for tax purposes has an effect on the IRS tax form that companies must plan. For example, if a worker is identified as an employee, their employer is normally required to provide them with a completed copy of IRS Form W-2. You can consult an Employment Lawyer for any concerns regarding this complex case.
On the other hand, independent contractors usually receive a completed copy of IRS Form 1099-MISC from the company that paid them. As a result, many people refer to independent contractors as 1099 staff and conventional employees as W-2 employees in the form of taxation.
Beyond the gaps in documentation, a worker's classification may significantly impact their legal rights. There are many legal tests that can be used to decide if an individual is an employee or an independent contractor under California law. Although the tests are similar, they are not identical. The rights or responsibilities in question will determine the required test. The following are the most critical tests:
The IRS's "power" test for federal income tax purposes;
The "ABC" exam, which is used in California law for most wage and hour issues
Where the ABC test does not apply, the "manner and means" test is used as a fallback under California wage and hour laws
The "economic realities" test, which federal courts apply
California's anti-discrimination laws
Despite the fact that each evaluation is slightly different, the main element in each is the degree of control the hiring team has over the employee. The greater the hiring party's influence, the more likely the worker would be classified as an employee.
Will Form 1099 or W-2 Be Filed for Federal Tax Purposes?
Depending on whether a worker is listed as an employee or an independent contractor, the federal tax responsibilities of employers and companies may differ significantly. Self-employment taxes, social security and Medicare withholdings, unemployment taxes, and income tax withholdings are all likely to be affected by the distinction.
The classification of a worker has an effect on the forms that companies must fill out. Employers are typically expected to send a completed copy of IRS Form W-2 to their employees. Independent contractors, on the other hand, usually receive a completed copy of IRS Form 1099-MISC from the company that paid them.
The Internal Revenue Service (IRS) looks at whether the company has the ability to monitor the facts and means by which the worker conducts his or her job to decide whether a worker is an employee or an independent contractor.
A worker is called an employee if a company has the authority to monitor the specifics of his or her job.
The IRS considers a number of factors when determining whether a company has adequate influence over how a worker conducts their job to establish an employment relationship. These are some of the factors:
Controlling one's actions.
Even if the employer does not exercise its right of influence, a worker is an employee if the company has the right to control the person's job. This consideration considers who has power over when, where, and how the work is done, as well as the level of guidance and training provided to staff and how the company judges the finished product.
When a company has the authority to monitor the financial aspects of a worker's job, the worker is more likely to be listed as an employee. This consideration considers whether the company pays for the employee's equipment, how the employee's compensation is measured, and whether the employee will win or lose money on the job.
The Parties' Relationship
An aspect is how the worker and the company perceive their relationship. Written contracts detailing the partnership are taken into account, but they aren't always definitive. Other facts, such as whether the company offers insurance or the relationship's longevity, may be considered.
The most critical of these considerations is behavioral regulation, but none of them is inherently definitive. Instead, the IRS would consider the entire employment relationship and weigh each aspect in light of the facts. The IRS may also take into account factors that aren't mentioned above.
Even if they don't follow the normal employment arrangement test outlined above, some jobs are legally classified as "employees" for the purposes of federal employment taxes. Statutory employees are the staff in question. They may contain the following:
For IRS purposes, drivers who sell or transport foods, vegetables, fruits, bakery goods, laundry, dry cleaning, or drinks other than milk are often called employees.
Agents who sell life insurance.
If agents work full time selling life insurance or annuity plans exclusively with one life insurance firm, life insurance sales agents are often called employees for IRS purposes.
Salespeople who travel.
Traveling salespeople who work full-time for a company selling resale products or supplies for use in the buyer's business activity can fall under the IRS's statutory concept of "employee."
Workers who work from home.
If they are expected to return such materials or goods to the business, and the business gives specifications for the work to be performed, an individual who works at home on materials or goods provided by a business may be considered a statutory employee for IRS purposes.
If a worker falls into one of these groups, there are three additional conditions that must be met before a company can legally deem them a statutory employee. The following are the requirements: The service agreement must state or indicate that the worker will perform all of the services substantially personally, that the worker will not have a significant investment in the equipment or property used to perform the services (other than a vehicle or truck), and that the services will be provided on a continuing basis for the same company.
If all three criteria are met, and the worker falls into one of the categories mentioned above, the worker must be counted as an employee for federal employment tax purposes. This is valid even though they aren't considered an employee in the conventional sense.
Keep in mind that even though this test isn't fully satisfied, the worker will still be classified as an employee if they pass the IRS's standard classification test. In contrast, a worker could meet the definition of a statutory employee for federal tax purposes while still being classified as an independent contractor under California law.
Under federal tax codes, such jobs are classified as "non-employees." Even if a worker meets the standard employment relationship test outlined above, they will have this status. Statutory non-employees are staff who are typically treated as independent contractors. Statutory non-employees are divided into three categories:
Real estate agents
If they are providing services pursuant to a written arrangement that specifies they will not be considered as an employee for federal tax purposes, licensed real estate agents who receive substantially all of their money from sales or other output rather than hours worked are statutory non-employees.
Sellers who sell directly to the public.
Statutory non-employees are people who work in the consumer goods industry, deliver newspapers, or distribute shopping news. Additional provisions, however, are required to satisfy the legal description of a "direct seller," which can be found here.
Someone who looks after children, the elderly, or the disabled is known as a sitter. Sitters who work for a placement service that connects them with potential clients are often not considered employees of the service because the service does not receive or pay the sitter's salaries.
It's worth noting that these categories only apply under federal tax law. It is likely that a worker is classified as a statutory non-employee for federal tax purposes but as an employee under California labor laws.
Under California law, the ABC Test is used.
Wage and hour laws in California offer workers a lot of rights. In general, those labor laws are more favorable to employers than federal labor laws. As a result, the most common test used to assess if a worker is an employee is the one prescribed by the California statute.
The default rule under California law is that a worker is an "employee" if they perform labor or services for someone else in return for a wage. The recruiting agency bears the responsibility of proving that the worker is not an employee. Only if all three of the following conditions are met can a recruiting body prove that a worker is an independent contractor (rather than an employee):
In terms of how the job is done, the worker must be free of the hiring entity's power and direction.
The worker's labor or services must be beyond the recruiting entity's normal business operations.
The worker must be regularly employed in an independently developed trade, profession, or company of the same nature as the job is done.
Of course, there are exceptions to this rule, but the main point is that California law interprets employment arrangements narrowly in favor of determining whether a worker is an employee or an independent contractor.
A written agreement isn't conclusive.
Importantly, whether a worker is an employee or an independent contractor for legal purposes is not determined by the mark a company puts on them. If the parties have a formal agreement specifying that the worker is an independent contractor, but the parties behave like an employer and employee, the agreement would be ignored by the courts.
Similarly, whether or not a worker is classified as an independent contractor is not determined by whether or not he or she is given a 1099 form for federal tax purposes rather than a W-2 form. Under California law, the legal standard for determining whether an employment arrangement exists differs slightly from the test used for federal tax purposes. In addition, some companies wrongly identify their employees as independent contractors in order to minimize the costs of employing them.
As a result, many people who claim to be "independent contractors" are simply employees. When a worker is misclassified, they could be entitled to all of the benefits they would have received if they were identified correctly as an employee.
Simply put, the law mandates that staff be regarded as employees if they fulfill the legal meaning of that position, regardless of whether the company calls them that. A person's work title does not determine whether they are an employee or an independent contractor.
When the ABC Test Controls are Allowed
The ABC test is the most common under California law, but it isn't always the best way to decide whether a worker is an employee or an independent contractor. When three sets of rules are applied, the ABC test provides control:
Code of Labor.
Most elements of the employment relationship are governed by California's Labor Code. The minimum wage, labor law exemptions, hours of service, occupational safety, and other laws are all covered by these statutes.
Orders for Wages.
Many work conditions in California are defined by a set of wage orders. The wage orders, which can be found here, are legally binding. They cover topics such as overtime pay, meal and rest breaks, and some recordkeeping provisions.
Code of Unemployment Insurance.
Unemployment insurance is governed by California's Unemployment Insurance Code, as the name implies. Disability insurance, some tax withholdings, the CalWORKs initiative, and other workforce development services are among the topics covered.
If the legal rights provided by any set of rules above are in question, the ABC test would be used to decide if the worker is an employee or an independent contractor for the vast majority of employees. There are, however, exceptions, as with most legal codes. If a court determines that the ABC test cannot be applied in a particular case for any reason, the manner and means test is used as a fallback. Ask an Employment Lawyer for anything that's unclear.
A law or regulation can have its own description of what it means to be an employee in some cases. This definition may be in contrast with the ABC test's definition.