By James C. Counts II, CPA
California presumes all workers are employees unless you can prove otherwise, as of Jan. 1, 2020, under a new California law, known as AB5. This new law is California’s fix to the gig economy. It is presumed that all workers are employees unless the company can document the requirements that the worker is qualified to be treated as an independent contractor (IC). It does not matter if the hiring entity is located either in or out of California but does the individual work in California.
Generally, workers must meet a three-part test, the Dynamex ABC test, to determine an employee or IC classification. To satisfy the test, the business must be able to prove that the worker:
- is free from the company’s control,
- performs work outside the company's primary business, and
- is regularly engaged in the industry.
To meet many of the exemptions from the ABC test in AB5, conditions in Borello’s multifactor test must then be met.
A company is not required to document before hiring a worker as meeting one of the many exemptions to qualify as an IC. However, prudence says a hiring entity should document IC qualifications before hiring them.
Entities should also document ICs hired prior to Jan. 1, 2020. An individual who does not qualify as an IC should be reclassified as an employee for California proposes. This does not automatically say they will be an employee for IRS purposes or even in your state.
California AB5 http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB5&firstNav=tracking
California Supreme Court decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903
California Supreme Court decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341
About the author
James C. Counts II, CPA, is a member of the California CPA Society, Committee on Taxation and is the liaison to the California Employment Development Department for the Society.