Independent contractor or employee? In general, an independent contractor is in business for themselves. However, with the explosive rise of the sharing economy spawning global giants such as Uber and Airbnb, definitions are being challenged and the question of employment status is receiving more attention than ever.
Various states are wrestling with challenges in determining how to classify workers who make money by sharing their assets, such as a home or a car, as well as in more traditional roles.
Under state and federal laws, employees are generally entitled to a range of protections that do not apply to independent contractors:
- Employers must withhold state and federal payroll taxes for their employees
- Employers must provide workers’ compensation insurance for their employees
- Employees are eligible for unemployment insurance benefits from the state
- Employees are entitled to wage and hour protections, including minimum wage and overtime
- Employees are protected under federal and state antidiscrimination laws
Federal Issues Concerning Independent Contractors
For independent contractors, an employer is generally not required to withhold nor pay any taxes. However, simply classifying an individual as an independent contractor does not make it so. Should the IRS determine that a company has misclassified employees as independent contractors, that company faces federal fines on top of back payments for employment taxes.
California Laws Concerning Independent Contractors
In California, several different government agencies are involved in setting guidelines to make the determination regarding independent contractor status. The general interpretation is that the more company control over how and when a worker performs, the more likely employer status.
According to the California Chamber of Commerce, the California Common Law test deems that, “The most important factor in that determination involves the independent contractor’s right to control the manner and means of accomplishing the desired result, even if the contractor does not exercise that right with respect to all details.”
Factors In California Classification Test
In addition to asking whether the parties believe they have created an employment relationship, California Department of Labor Standards Enforcement (DLSE) considers such questions as:
- How much control does the company have over how the work is done?
- Is the worker engaged in a separate occupation or business from the alleged employer?
- Is the work part of the company’s regular business operations?
- Who provides the materials or equipment needed for the work?
- Does the work require a special skill?
- Is the work usually done under company supervision or without supervision?
- Does the employee have the opportunity for profit or loss?
- How long are the services expected to last?
- How permanent is the working relationship?
- How is the worker paid?
As there is no single definitive factor, the State of California has issued a two-page document entitled “Independent Contractors.”
In the explosive gig economy, it’s important to be aware of employment laws and classifications — for independent contractors and employers alike.
Resolve your tax problems by visiting Rush Tax Resolution.
For more tips and inspiration for small business owners, visit Small Business Pulse Los Angeles.