The guidelines for employers regarding who they can or cannot classify as a W-2 employee or a 1099 Contractor have seen some changes in past years, but the latest court ruling means some dramatic changes are going to be taking place as businesses come into compliance with the new standard. On April 30, 2018, the California Supreme Court passed down a ruling regarding the classification of W-2 employees and 1099 contractors which alters it yet again. So listen up, as this may impact your business!
Previously there was a lengthy multi-factor test that an employer would use to determine if they had classified all of their 1099 contractors correctly or if they needed to re-classify them as W-2 employees. Now the California Supreme Court is stating that employers need to use the ABC test.
The test established by the Court in California reads as follows:
“The [new] ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions: (a) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and (b) that the worker performs work that is outside the usual course of the hiring entity’s business; and (c) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.” – Dynamex Operations West, Inc. v. Superior Court of Los Angeles, No. S222732 (Cal. Sup. Ct. Apr. 30, 2018)
This new standard makes California’s policy regarding independent contractors one of the most restrictive in the United States.
Employers who traditionally hire employees for short periods to help them get through their busy season but pay them as 1099 contractors will no longer be able to do so. If you hire someone to perform the same work that your company already performs, even if it is for a shorter period of time, they will need to be hired and paid as any other W-2 employee.
This will mean increased costs for employers in many areas including, but not limited to, increased taxes through FICA, workers comp premiums, and in some cases health benefit premiums if the employees meet the eligibility criteria. However, even with the potential increase in costs, the penalty for non-compliance with the new 1099 employee test could be much higher.
By Elizabeth Kay