If you run a business, you may hire contractors because of the potential savings they provide. Unlike full-time employees, you do not have to cover their payroll taxes, health benefits, time off, or sick leave. However, employing contractors incorrectly could put your company at risk for claims. Workers may allege you misclassified their employment status to cut costs. And improper classification can lead to penalties if not addressed properly. Savvy employers know that key differences apply when classifying contractors and employees. Employers who understand the differences can take corrective action as needed to protect their businesses.
Key Differences Between Employers and Contractors
In 2019, California signed into law AB 5. This legislation requires employers to use a three-part evaluation – the ABC test – to classify workers. A worker must meet all three criteria to qualify as an independent contractor. If they meet only one or two, they must be classified as an employee.
The ABC test classifies workers based on whether:
- Their performance is controlled by your company;
- Their role falls outside your company’s typical scope of business; and/or
- Their work for your company is only a part of their duties within their own independent operation
Which Test Applies, ABC Or The Borello Test?
The ABC test does not apply to independent contractors of all professions. Instead, the Borello test applies to many professionals who perform contract work – like doctors, lawyers, and salespeople – and considers many variables that dictate a worker’s classification. Like the ABC test, the Borello factors focus on the level of control a company exercises over the worker. The Borello test analyzes:
- Whether the worker or employer provides the necessary equipment for the role;
- Whether the worker requires specific skills to perform the role;
- Whether the worker’s relationship with the employer is temporary or ongoing, and how long the services will be performed;
- Whether the worker’s role typically requires direction or supervision;
- Whether the work is part of the company’s regular business;
- The worker’s financial investment in equipment or materials;
- The worker’s opportunity for profit or loss;
- The payment method, whether by time or by the job; and
- Whether the parties believe they are creating an employer/employee relationship
Potential Penalties, Fines And Fees
Misclassifying workers comes at a serious cost. If a worker files a claim with the Labor Commissioner or a lawsuit against your company, you could face serious financial penalties. The fine your business pays will depend on whether you intentionally misclassified workers. If you did, you could pay up to $25,000 for a single violation. And your business may be liable for further damages too, for underlying wage violations such as unpaid overtime, failure to provide meal and rest breaks, statutory penalties, interest, and attorneys’ fees, if the worker makes a claim.
Contractors can contribute valuable work and offer savings for your company. But it’s crucial to make sure you classify these workers correctly. Consulting with experienced employment counsel can help your business avoid costly, time-consuming disputes and stiff penalties.