May 31, 2018
ABC Test: Freelancers Are Now an Even Bigger No-No in CA
Posted by Jenn McCabe
On April 30, the CA Supreme Court issued a long-awaited ruling that makes their description of “employment” even clearer. (See Dynamex Operations West, Inc. v. Superior Court, Cal.5th, 2018 WL 1999120). If you thought you had the employee vs. independent contractor (freelancer) thing nailed, you might need to think again.
The good news, and the bad news, is that the state’s worker classification rules are clearer now than before. There is virtually no grey area or “weighting” of factors regarding degree of control exercised over the worker (federal standards are still a bit hazy and allow for more interpretation of control). California has adopted a new three-factor ABC test, which we have taken the liberty of presenting here in a decision tree fashion, to help you classify a worker quickly and easily.
The Three-Factor ABC Test
Basically, everyone should be considered an employee unless the employer can rebut this premise using all three of these critical factors in the ABC test:
- Does the worker own and independently operate a trade/business of their own? If so, they should prove it by providing a federal ID number, or failing that, some sort of professional license number. This is actually factor C of the ABC test, but we put it first. If this test can’t be easily satisfied, put this worker on payroll, temporarily at least. Our practical advice:
- Ask your vendors to display their business licensing on their invoices for easy reference in the event of a CA EDD audit of your vendor payments or 1099s.
- If someone gives you a Social Security number as their tax ID, even if they tell you they prefer to be a “freelancer,” it’s not up to them. Put them on payroll or get professional advice before you skirt this rule.
- If someone tells you that they don’t want taxes withheld, your freelance radar should sound a warning.
- You can’t coach a worker and tell them to get an FEIN or a business license. They may not understand the obligations they assume as a business owner in terms of the ongoing business tax filing.
- The work being performed should be outside the normal course of business and service provided by the hiring entity. This is Factor B, which we also put second in our decision tree. The practical application:
- This means that if you augment your staff during a busy season with other professionals, even if they are licensed, they probably need to go on payroll.
- If they use a title that matches other titles given to your employees, they probably belong on payroll. Warning signs should appear if they have been given a company title, email, or business card!
- Is the worker told where, when or how to do the work? This is where degree of control comes up again, so the confusion didn’t entirely go away. We put this as third, not first on our list: If you get this far, it’s the trickiest issue and most likely to result in a discussion and weighted factors. Our advice:
- Every situation has to be measured on its own. Don’t make rules or assume this is easy.
- Again, coaching a worker to get a business license amounts to controlling them, so don’t do it.
- In the modern economy, if a worker is remote, you can’t assume that means they are independent.
- If the person is economically dependent on the work, or if this is their one big gig, they probably belong on payroll.
- If your team uses terminology commonly used in employment, beware! If the person is a contractor, they should not get reviewed or fired, or participate in your benefit or retirement plans.
Keep in mind that the heart and soul of these rulings is protecting workers. Even if you consider yourself a “good” employer, the rules apply because the state wants you to employ more workers unless there is ample proof that they take care of themselves. It’s not just about tax revenues, though it surely helps them control the process when taxes are withheld and paid by an employer.
Have questions about worker classification? Feel free to call our HR experts for help, even if you are not a California employer.
Jenn has more than 25 years of outsourced accounting and finance experience, with a particular expertise in startups and the advertising and creative production industries. She is passionate about seeing companies utilize the latest accounting technology to maximize their efficiency, productivity, and ultimately, success.
Before joining Armanino, Jenn founded and led Team Jenn Corp., a firm dedicated to the strategic financial management of startups and small businesses, offering a comprehensive back office solution with accounting, finance and HR solutions. Previous roles include stints at advertising giant Ogilvy and Mather, and in the cash management industry.
Jenn has a bachelor’s degree in economics from Pepperdine University and is a member of several professional associations including the National Society of Accountants, ProVisors and the Women’s Business Enterprise Network.