Summary:  California Supreme Court has established a new standard that makes it much more likely that workers will be W-2 Employees – not 1099 Contactors.

The distinction between a 1099 independent contractor and a W-2 employee is an important one, as this classification affects both federal and state tax issues, and it is important that business owners correctly determine the employment status of workers. Misclassifications can result in liability of the company for missing employment taxes, interest, and penalties and entitlement of the employee to past benefits.

Until recently, the test for determining whether a worker is an independent contractor or an employee could be complicated because the test was unclear and there were a number of factors to be considered. However, recently, the Supreme Court of California helped answer the question of whether workers should be classified as employees or as independent contractors for purposes of California wage orders. Dynamex Operations W., Inc. v. Superior Court, 4 Cal. 5th 903, 416 P.3d 1, 5 (2018). The court decided to utilize a new test to make this determination more clear. Now, in California, a worker is an independent contractor only if: (1) the worker is free from the control and direction of the hirer in connection with the performance of the work; (2) the worker performs work that is outside the usual course of the hiring entity’s business; and (3) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

This test adopts a much more expansive classification of “employee.” Under the first “control and direction” element, a business doesn’t need to control all details of the work in order for the worker to be an employee. The second “outside the usual course of business” element is likely to pull in many workers that were previously categorized as independent contractors. This element will include “individuals who can reasonably be viewed as working in the hiring entity’s business.” For example, if a clothing manufacturing company hires seamstresses to make clothing from home or a bakery hires cake decorators to regularly work on custom cakes, those workers are working in the same business as the hiring company, and are thus, employees. To be an independent contractor the scenario would have to more closely resemble that of a retail store hiring an outside plumber to repair a leak on the premises. Since there, the plumber’s business of plumbing is clearly much different than the hiring business’s retail business, the worker may properly be considered an independent contractor. Lastly, the “customarily engaged” element asks if the worker has independently made the decision to go into business for himself, taking the steps of establishing and promoting an independent business, rather than simply being designated an independent contractor by the hiring business.

If you are unsure how this update affects the employment status of individuals performing services for your business, call General Counsel PC at 703-556-0411 today and our attorneys can help you make that determination.