Independent Contractor or Employee: What the Law Says in California
Introduction
When you’re running a business in California, how you classify the people who work for you matters. It affects everything from how much you pay in taxes to what benefits your workers are entitled to. Whether someone counts as an independent contractor or an employee can decide whether your business is compliant—or headed toward legal trouble. This isn’t just about tax forms. Missteps in classification can lead to complaints, back pay demands, and audits. In such cases, seeking guidance from California Business Lawyer & Corporate Lawyer Inc., especially a lawyer for business disputes, becomes critical to avoiding penalties related to the misclassification of employees as independent contractors.
Why Getting It Right Matters
Deciding whether a worker should be labeled an employee or an independent contractor changes which rules apply. Employees have protections under wage and hour laws. They receive minimum wage, rest breaks, overtime pay, and reimbursements for work-related expenses. Independent contractors are expected to handle their own taxes and don’t receive these benefits. Many businesses use contractors to reduce costs. But this approach can quickly create legal trouble if the classification doesn’t meet California’s requirements. Legal representation from Nakase Law Firm Inc. is often sought in such scenarios, where a business defense lawyer is essential to protecting a company facing claims of misclassification of employees as independent contractors.
California’s ABC Test
In 2020, California introduced the ABC Test to tighten classification rules. This came from a court ruling called Dynamex and was written into law under Assembly Bill 5 (AB5). According to this test, workers are considered employees unless the business can prove:
- A. The worker controls how the work is done and is not directed by the hiring company.
- B. The work is not part of the company’s main services.
- C. The worker already runs their own business providing similar services to other clients.
If any one of these points doesn’t apply, the person must be classified as an employee.
Not Everyone Falls Under the ABC Test
Not all professions are subject to the ABC Test. Some workers—like lawyers, doctors, accountants, and specific freelancers—are reviewed under an older method called the Borello Test. This test looks at how independent the person is. It includes:
- How much control the business has over the work
- Who provides tools and supplies
- Whether the person risks profit or loss
- What level of skill the task requires
Unlike the ABC Test, this method considers several factors rather than requiring all to be met.
What Can Go Wrong With Misclassification
Labeling someone incorrectly can lead to serious financial issues. If a business is found to have done this, it could be ordered to pay:
- Unpaid wages
- Missed overtime
- Penalties for skipped breaks
- Employer taxes
- State fines and interest
The California Labor Commissioner may also conduct audits, which can expand into deeper investigations. If multiple workers are affected, the case might turn into a group lawsuit, increasing the risk for the business.
Federal Tax and IRS Oversight
Beyond California, the IRS also reviews worker classifications. The agency looks at how much control the business has, who owns the tools, how payments are made, and whether the job is temporary or ongoing. Misclassification at the federal level can lead to tax bills, interest, and fines.
If a worker disagrees with their classification, they can file Form SS-8 with the IRS, which may lead to a formal review of the business’s practices.
Proposition 22 and the Gig Work Shift
Gig companies like Uber, Lyft, and DoorDash have drawn attention to this issue. These companies built their model using independent contractors. When courts and lawmakers pushed back, voters passed Proposition 22 in 2020. This allowed app-based drivers to remain contractors but still receive a few benefits.
This rule doesn’t apply to most businesses. It’s focused on a specific group and has already faced legal challenges. Any changes to Proposition 22 could alter how companies operate in this space.
What Businesses Can Do Now
To avoid trouble, business owners should take a careful look at how they work with contractors. Consider the following:
- Review Current Roles: Use the ABC Test and Borello Test to double-check how each worker is labeled.
- Put Everything in Writing: Have clear agreements with contractors that describe the scope of the work.
- Keep Your Distance: Don’t micromanage contractors. Let them set their schedule and work style.
- Talk to an Attorney: Employment laws shift often. An experienced lawyer can offer advice based on the latest legal rules.
- Train Your Team: Make sure those involved in hiring and managing people understand how classification works.
What Workers Can Do If They Disagree
If someone thinks they’ve been mislabeled, they can file a complaint with the Labor Commissioner or start a court case. They might be owed money for missed wages, unpaid overtime, and other losses. Businesses can also face state fines and be required to reclassify the worker.
Some cases grow larger if many workers file together. These cases can bring larger costs and more public attention. California also protects workers who speak up about these issues from being fired or punished.
Why Legal Help Is Worth It
Employment law is full of moving parts, and mistakes are easy to make. Getting help from a legal expert helps business owners stay within the rules. Whether you’re starting a company, hiring new people, or already facing a claim, a business attorney who knows California law can be a valuable resource.
An attorney can also help if a claim has already been filed. They can help gather facts, respond to agencies, and represent your business in court if needed.
Closing Thought
Worker classification in California isn’t something to guess at. It comes with real consequences. If you’re hiring help, how you label that person can affect your business in lasting ways. Misclassifying employees as independent contractors is a common error that leads to expensive legal trouble.
Taking the time to set up your roles correctly—and getting professional input when needed—can help your company avoid future problems and stay legally sound.