![]() Importantly, the label a business places on a worker does not determine whether the worker is an employee or an independent contractor for legal purposes. 40 If, for example, the parties have a written agreement stating that the worker is an independent contractor but the parties act like an employer and employee, courts will ignore the agreement. 41 On September 4, 2020, Governor Gavin Newsom signed into law a significant restructuring of the law in AB 2257, which clarified and reorganized exceptions to the ABC test, as well as adding new exceptions. 39Ģ.3. 5 (Opens in new window) (AB-5).ĪB-5 was signed into law by Governor Gavin Newsom on September 18, 2019. 38 It add certain Labor Code sections and changed several other statutes to make the Dynamex decision broadly applicable in many wage and hour contexts. This change in the law was met with approval by the California legislature, which codified the Dynamex decision in Assembly Bill No. ![]() In doing so, it adopted the ABC test and placed the burden on the hiring entity to establish that the worker is an independent contractor. 37 In light of the potential harms, the Dynamex court made it more difficult for hiring entities to characterize workers as independent contractors. He risk that workers who should be treated as employees may be improperly misclassified as independent contractors is significant in light of the potentially substantial economic incentives that a business may have in mischaracterizing some workers as independent contractors.ĭynamex Operations West, Inc. The court in Dynamex, however, found that the manner and means test posed too great a risk of misclassification, which potentially harmed workers, competitors, and the public as a whole. 36 The Dynamex court therefore adopted the ABC test and placed the burden on the hiring entity to establish that the worker is an independent contractor. Previously, California law required courts to consider several factors when examining the nature of the worker’s relationship with the hiring entity. 35 This multi-factored approach (called the “manner and means” test) is still used in some situations and is explained in Chapter 3. It was first adopted by the Supreme Court of California in 2018, in a landmark case called Dynamex Operations West, Inc. The ABC test reflects a dramatic change in California law. Recent Changes: Dynamex, AB-5, and AB 2257 The IRS uses several factors to analyze whether a business exercises enough control over the way a worker performs their job to create an employment relationship. ![]() To determine whether a worker is an employee or an independent contractor, the Internal Revenue Service (the IRS) looks primarily at whether the business has the right to control the details and the means by which the worker performs his or her job. 11 If a business has the right to control the details of an individual’s work, the worker will be considered an employee. 12 Independent Contractors, on the other hand, are usually provided with a completed copy of IRS Form 1099-MISC (Opens in new window) by the business that paid them. Employers are usually required to provide their employees with a completed copy of IRS Form W-2 (Opens in new window). The way a worker is classified can also impact the forms that businesses are required to prepare. Most commonly, the distinction will affect self-employment taxes, 7 social security and medicare withholdings, 8 unemployment taxes, 9 and income tax withholdings. 10 The federal tax obligations of workers and businesses can vary significantly depending on whether the worker is classified as an employee or an independent contractor. The appropriate test will depend on which rights or obligations are at issue. The tests are similar, but not identical. Under California law, there are several legal tests to determine whether a person is an employee or independent contractor. For this reason, many people refer to independent contractors as 1099 workers and traditional employees as W-2 employees in the context of taxes.īeyond the paperwork differences, the way a worker is classified can affect important legal rights. If a worker is classified as an employee, for example, their employer will usually be required to provide them with a completed copy of IRS Form W-2 (Opens in new window). For tax purposes, the way a worker is classified will impact the IRS tax form that businesses are required to prepare. There are two main types of workers in California: employees and independent contractors.
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