The Test to Determine Whether a Worker is an Employee or a Contractor

Why does it matter if a Sacramento worker is considered an independent contractor or employee? The difference is in the benefits. Employers do not have to provide as many benefits and rights to independent contractors as they do for actual employees.

To dig further into the disadvantages, contractors:

  • Can be fired more easily than employees
  • Are not eligible for unemployment insurance, minimum wage, or overtime pay
  • Are not protected by state and federal anti-discrimination laws
  • Do not have income tax withheld

California Governor Gavin Newsom signed Assembly Bill 5.AB5, which went into effect January 1, 2020, to change the way workers in the state are identified. This will better solidify the Labor Code, the Unemployment Insurance Code, and the Industrial Welfare Commission wage orders. Tests have been developed to make sure these classifications of independent contractors versus contractors are done properly.

What is the ABC Test?

California’s ABC Test requires employers to apply certain conditions to the hiring process to determine if workers should be classified as an employee or independent contractors. This test actually considers workers an employee by default unless those hiring can prove these three conditions:

  1. The worker is free from the control and direction of the person hiring in connection with the worker’s performance.
  2. The worker does their job outside the typical methods of the hiring business.
  3. The worker already operates in an independent trade, occupation, or business similar to the hired job.

What is the Borello Test?

While the ABC test is the standard for California employers, Sacramento workers in certain industries may also be subject to the Borello test, which considers a few factors during the employer’s hiring process, such as:

  • Whether or not the work performed is an essential part of the business
  • Whether or not the worker invested in the equipment or materials needed for the job
  • Whether or not the job requires a special skill
  • The method of payment, such as by the hour or salary
  • The length of time the job is supposed to be performed

What is the Common-Law Test?

This test acts as a set of guidelines the IRS uses on the federal level to classify workers as employees or independent contractors. By measuring how much behavioral and financial control an employer has over a worker, the three factors of the Common-Law Test, or Right-to-Control test, determine if they are indeed an employee.

Behavioral Control

There are four facts that will prove an employer’s right to say how a worker conducts their job or determines behavioral control, which means they are an employee:

  • If a business gives instructions on how, when, and where a worker performs their duties.
  • If a business gives more specific instructions, the more control they have over the worker.
  • If a business has a detailed evaluation system that measures work performance, not just judging the end result.
  • If a business trains the worker on how to do their job, instead of being free to perform their job duties their own way.

Financial Control

These five financial control factors will determine whether or not a worker is an employee:

  • If a worker is making a significant investment (though there is no specific dollar amount set) in their tools, materials, or resources, they are more likely an independent contractor.
  • If a worker incurs more unreimbursed expenses, it is more probable that they are an independent contractor. Although, this can be a blurred line because employees can also tack on unreimbursed expenses.
  • An employee usually makes more of a profit, while an independent contractor has more losses. This is based on the accumulation of unreimbursed expenses.
  • Independent contractors have the freedom to advertise that their services are available to other businesses in the market, where employees are restricted by company policies if they want to run a side business.
  • Different payment methods will determine if the worker is an employee or a contractor. Independent contractors are normally paid a flat fee or by the hour for each job they are assigned. An employee has a set hourly wage or salary, which could include commission, for a period of time.

The Different Degrees of Relationships Between the Business and the Worker

There are four different categories of agreements between a business and a worker that will help determine how to classify the worker’s relationship, which includes:

  • Employee benefits, such as health insurance, paid time off (PTO), and sick days are available to employees, not contractors.
  • Written contracts, which clearly define how the business and worker work together.
  • How long the working relationship is, which, for an employee, is an indefinite period of time when hired and, for an independent contractor, is a specific time period for each project.
  • The level of services provided, meaning an employee offers services that are central to the business and under the company’s direct control.

Why Employers Should Correctly Classify Their Workers

It is crucial not only for employees to be correctly classified as either an employee or contractor but for employers as well because it affects the business taxes and reports they submit to federal and state governments.

For example, employees receive a W-2 form, and independent contractors receive a Form 1099 to file their tax returns. If workers are misclassified, financial penalties may ensue.

What Workers Should Do if Misclassified as a Contractor

There are a few steps workers can take if they feel they have been improperly classified as a contractor and should instead be an employee, receiving more rights and benefits.

  1. They should meet with their supervisor first to discuss and review their work status classification.
  2. Ask the IRS to review the case, as well as the Department of Labor and Workers’ Compensation Board.
  3. File taxes and include Form 8919, which allows contractors to pay only their portion of the payroll taxes if they believe they have been wrongly classified. If the IRS audits the tax return and rules that the worker is not an employee, this form should be brought to Tax Court.
  4. Hire a misclassification attorney well-versed in seeking justice for employees.