25 Jan Independent Contractor Rules Rewritten In California – How do they affect the domestic staffing industry?
The California legislature approved a controversial new law that will reshape the way businesses across the state classify workers. While supporters of the bill have emphasized its impact on independent contractors, the bill also severely impacts legal obligations governing businesses that hire other businesses.
In short, the law is making it much more difficult for many companies to treat workers in California as independent contractors, and more difficult for businesses to hire smaller, entrepreneurial businesses. The new law has taken effect on Jan. 1, 2020.
The author of California’s new law, Assemblywoman Lorena Gonzalez, said it was designed to stop businesses from misclassifying workers. The gig economy has changed the employment landscape in ways that would have been hard to predict. California wants to stop what it claims are ‘free-riding businesses’ from passing their costs on to taxpayers and workers. Having employees triggers federal and state tax withholding, anti-discrimination, health care, pension, worker’s compensation and unemployment insurance obligations.
Under the new law, California workers could generally be considered independent contractors only if the work they do is outside the usual course of a company’s business. Conversely, workers must be employees not contractors if either a company exerts control over how they perform their tasks, or if their work is part of a company’s regular business. That latter rule is key.
From an employer’s viewpoint, paying independent contractors offered the benefits of:
- No income tax withholding;
- No employment taxes;
- No liability for acts of employees—like driving a car on company business;
- No federal and state discrimination laws covering only employees; and
- No fringe benefit, pension, retirement, or other plans.
What is the new law?
The new legal standard, called the “ABC Test,” provided that a worker would be deemed to be an employee unless the putative employer proved all three of the following criteria:
(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the 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.
Household Staff – Employee or Independent Contractor?
When a family hires someone to perform duties in or around their home, they are considered a household employer. The IRS views the worker whether a nanny, health aide, housekeeper, senior caregiver, gardener, chef, personal assistant, estate manager, etc. as an employee of the family under common law. It does not matter how many hours they work, whether the position is permanent or temporary, or how much you pay the worker.
Misclassifying an employee as an independent contractor (using Form 1099) is considered tax evasion, so please contact your agency if you’re not sure how to classify your worker.
These are the several legal tests used to determine staff’s status:
Economic reality test– Is this the person’s only job? Even if it’s not, does she rely on this specific job for a considerable amount of her income? Is her financial livelihood entirely or partially dependent on this job? If the answer is yes to any of these questions, then she’s very likely an employee. Note, however, that even if a household employee works for multiple individuals, that does not necessarily make her an independent contractor, but simply more likely means that she is an employee of more than one employer.
Amount of control– Under common law, a worker who performs services for you is your employee if you can control what will be done and how it will be done. It does not matter whether you give your nanny great latitude, but rather that you have the right to control the work. It does not matter if the work is performed on a full time or part time basis. It does not matter whether the worker lives with you or not. It does not matter if he/she is paid hourly, daily or a salary. It does not matter how the employee refers to herself or how you refer to him/her in an employment contract. The household worker is your employee and you are generally obligated for all payroll tax filings and remittances.
For example, the nanny is usually told how to feed, dress, and bathe the children in her care, as well as which activities are acceptable and which are not. Ideally, the nanny has a detailed job description, but even lacking one, the level of control is usually enough to constitute an employer-employee relationship. This is different from, for example, a housekeeper who comes to your house once a week and is not told how to clean or which specific products to use. In that case, due to both the housekeeper’s economic reality (that you are only one of probably 20 to 30 clients and therefore don’t make up a large amount of her income) and the level of control you exercise over her work (minimal), she is likely an independent contractor.
Pay– If you pay a household employee such as a nanny, babysitter, caregiver or house manager more than $2,200 a year or $1,000 in a quarter to perform work in your home (or occasionally even out of your home such as in a nanny share), you are a household employer.
Regular and substantial hours– The more regularly a person works for a family, the stronger the case that she is an employee. It is when her hours are minimal and/or fluctuate significantly that she is more likely to be considered an independent contractor.
In the case of nannies, there are limited exceptions to the nanny as employee rule.
Involvement of Agency– If a family pays an agency directly for the nanny’s services, usually the agency, not the family, is the nanny’s employer. This is very rare, however, and most agencies specifically disclaim that they are not the nanny’s employer. Similarly, if the family brings their child to the nanny’s or another person’s home, and especially if the child is not the only child being supervised in that home, this tends to indicate that the nanny offers her services to the general public and is more likely an independent contractor.
Certain family members such as a spouse, children under 21 (unless it’s their principal occupation) and parents (under certain conditions) also generally do not constitute employees.
How the employee refers to herself, how the family defines her status in an employment contract, or how she is paid (hourly or salaried) do not carry significant weight in determining her employee status – simply because you call her an independent contractor doesn’t necessarily make it so!
Who are now called the Independent Contractors?
Like the IRS, the Department of Labor (DOL) looks to the Fair Labor Standards Act to give guidance on whether a worker is an employee or an independent contractor and there are different criteria for both distinctions. The DOL has seven factors to consider when classifying a worker, but for household workers, two stand out the most:
1. The permanence of the job – When an employee accepts a job, they will continue to be employed until their employer lays them off, terminates them with cause or they quit. An independent contractor has a set of duties they will perform over a certain timeframe and it’s understood that they will leave when the job is complete.
2. Economic dependence – Independent contractors are self-employed so they are providing their services to several different clients at the same time. Losing one client is not ideal, but will not generally cripple their business. An employee is generally dependent on their job for financial stability.
This distinction may be part of the reason why employees are eligible for unemployment benefits if they’re laid off due to no fault of their own, but independent contractors are not.