Contractor vs Employee
Your business is growing and you need help. So do you hire independent contractors or employees? Generally speaking, it is cheaper for a company to hire a worker as a contractor because there’s no payroll tax, no benefits that the company provides – healthcare, 401k, vacation, etc. There are fewer compliance issues and usually, the contractor will provide their own equipment and tools.
You might wonder why not hire all workers as contractors. The law requires a business to accurately categorize its workforce. Failure to do so can result in fees and penalties as well as back taxes. Normally, misclassifications come to light when the company has to end a relationship with a worker, that worker goes to apply for unemployment benefits and the state tells the worker that they were listed as W-2 employees of the business. That opens a can of worms.
Historically, worker categorization has been based on a multi-factor test which essentially boils down to whether the business had enough control over the worker to require a W-2 employees classification. However, the future of work is up for debate in Congress and state legislatures across the nation. California’s controversial new labor law, AB-5 went to effect past January. The new law dramatically redefines the test for whether workers are employees or independent contractors by creating a strict three prompt test knows as ABC TEST.
Under which workers are presumed to be employees unless employers can prove all three of the following conditions are met.
- The worker is free from control and direction in connection with the performance of service both under the terms of the contractor as well as fact.
- The service is performed outside the usual course of the business of the employer.
- The workers customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involves service performed.
AB-5 carves out exemptions for certain types of workers and the AB-2257 which was passed in September 2020, expands as exceptions. In addition, major tech companies like Uber, Lyft, Doordash, and Instacart have joined forces in investing millions into getting about the initiative in front of California voters this upcoming November.
The ballot initiative would exempt workers using their platforms from AB-5’s and ABC test. As the issue evolves, businesses that rely on independent contractors particularly those located in California will need to stay on top of how this develops.