What to Know About California Independent Contractor Law

FT Contributor  | 

Today’s workplace is changing as more and more professionals choose to work for themselves instead of working for a company. It’s an easy choice when it’s so simple to become an independent contractor today.

Now the gig economy has once again become the subject of hot debate on the West Coast, where new laws concerning California’s independent contractors have the companies who work with them up in arms.

What Is an Independent Contractor?

Known as independent contractors, these self-employed workers are often freelancers or small business owners who perform some sort of singular or occasional paid service for others.

As an independent contractor, it’s more important than ever to maintain your business or freelancer finances, because the rules work differently for independent contractors than they do for regular employees.

1099 Contractors

Before you complete work for a new company, you must provide that company with a Form W-9 that includes all of your tax information. It’s similar to the W-2 form that new employees complete for their employer, but a W-9 is created specifically to cater to independent contracting.

Filing taxes as an independent contractor means following a different set of rules and laws for the Internal Revenue Service (IRS). Independent contractors are also known as 1099 contractors because of the tax form you have to file.

As a contractor, you do not file the typical W-2 form that most employees file every year. Instead, you file a Form 1099. Every time you perform a paid service of over $600, your client must provide you with a Form 1099 to file with the IRS. Other stipulations and requirements may apply.

New Law for California Independent Contractors

If you’re a California resident, the rules surrounding independent contractors just got more complicated.

In January 2020, Governor Newsom enacted Assembly Bill No. 5 (AB-5). It further fine-tunes California’s independent contractor laws with a whole new set of requirements designed to prevent companies from exploiting 1099 tax breaks. It revisits a 2018 ruling by the California Supreme Court created to enforce certain freelancer rights and protections.

Per Dynamex Operations West, Inc. v. Superior Court of California, companies must abide by the “ABC” provision for meeting independent contractor requirements in California:

  1. Plan A — Is the worker working of his or her own volition without direct order or influence from the company?
  2. Plan B — Does the worker provide a service outside the scope of the company’s normal services?
  3. Plan C — Does the worker regularly provide services of a similar nature to other companies?

If you are able to meet all of these requirements, California recognizes you as an independent contractor. This is great if you work as a freelance writer or IT professional, but it is presenting a serious issue for today’s gig economy with the rise of side hustles for companies such as Uber and Lyft.

If you don’t meet the “ABC” provision, there are a few different arrangements for a company-contractor relationship:

  • Companies can hire contractors as employees;
  • Contractors could start their own businesses;
  • Companies may solicit help from other states.

Anyone that uses independent contractors from California must follow these new rules, regardless of the size or location of their company.

The Gig Economy Under California’s New Law

California’s new independent contractor laws are a direct response to the way in which the rise of the gig economy is affecting future employment.

Companies favor 1099 contractors because there are fewer demands and expenses, such as employee benefits. By utilizing workers of various positions within the gig economy, companies are able to forego the time and cost associated with regular employees.

It has led many companies to bend the rules when it comes to filing their taxes. Contractors may be cheaper without employee benefits and salary negotiations, but companies can violate state and federal laws if they employ a contractor in an ongoing capacity. Freelance work is designed to be rare and sporadic, which is why the IRS offers the extra tax benefits that it does.

It also creates a growing deficit for many freelancers who charge low rates to get a job but fail to account for the taxes and self-employed benefits they will need to provide for themselves.

Uber, Lyft, Postmates Refuse to Comply With California’s New Law

Not everyone is on board with California’s new independent contractor laws.

Popular ridesharing companies Uber and Lyft, as well as food delivery service Postmates, are contesting the new law. They argue that their drivers should be allowed the same rights as other independent contractors.

One possible alternative currently being explored is whether independent contractors could be organized into labor unions. By doing so, it would ensure a host of protective rights.

Uber and Postmates have filed an official lawsuit in federal court contesting the new measure. They are also among those currently championing for a referendum on the 2020 ballot.

Why California Established New Independent Contractor Laws

While certain professionals such as dentists and lawyers are exempt from these regulations, ridesharing drivers are not.

The California Supreme Court considers AB-5 an extra protective measure to make sure freelancers aren’t exploited in the workplace by companies looking to get out of paying employer benefits and taxes.

As the gig economy increases in popularity each day, fair wages and tax reporting continue to remain pressing issues for today’s workforce.

This is a new world that is growing faster than the law can keep up, so change will continue to come to the world of independent contracting as the government struggles to define a constantly fluctuating workplace.


Image Source: https://depositphotos.com/