Properly classifying workers as either employees or independent contractors is crucial for businesses in California. Misclassification can lead to legal issues, financial penalties, and damage to your company’s reputation.
This guide aims to help you understand the classification process using straightforward language and examples.
Understanding the ABC Test
California uses the ABC Test to determine if a worker is an employee or an independent contractor. Under this test, a worker is considered an employee unless the employer can prove all three of the following conditions:
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A: The worker is free from the control and direction of the hiring entity in performing the work, both under the contract and in fact.
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B: The worker performs work that is outside the usual course of the hiring entity’s business.
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C: The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
If any of these conditions are not met, the worker should be classified as an employee.
Examples:
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Example 1: A bakery hires a freelance plumber to fix a leak. Since plumbing is outside the bakery’s usual business, and the plumber operates independently, they can be classified as an independent contractor.
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Example 2: The same bakery hires a cake decorator to work regularly on custom cakes. Decorating cakes is part of the bakery’s core business, so the decorator should be classified as an employee.
Exceptions to the ABC Test
Certain professions are exempt from the ABC Test and instead use the Borello Test, a more flexible, multi-factor approach. Exempt professions include:
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Licensed professionals like doctors, lawyers, and accountants
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Real estate agents
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Certain freelance writers and photographers
Even if a profession is exempt, proper classification is still essential.
Why Proper Classification Matters
Misclassifying employees as independent contractors can result in:
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Unpaid wages and overtime
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Penalties for not providing benefits like workers’ compensation
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Liability for unpaid taxes
Ensuring correct classification helps protect your business from legal and financial risks.
Seeking Professional Guidance?!
Determining the correct classification of workers can be complex, especially with the nuances between the ABC and Borello Tests. Misclassification can lead to legal penalties, back taxes, and other complications.
At Velin & Associates, Inc., our experienced team of accountants and tax advisors in Los Angeles is here to assist you. We offer comprehensive accounting services to help you navigate worker classification and ensure compliance with California labor laws. For more information about our services, please visit our website.
Velin & Associates, Inc
8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org
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