Employee or independent contractor? New decision brings sweeping changes

There was a time, not so long ago, when businesses in all industries thrived on the labor and talent of workers classified as independent contractors. Even before “gig economy” and “side turmoil” got the talk (and companies like Lyft and Uber made them newsworthy). Hairdressers, construction workers, writers and dog walkers were all classified as independent contractors with little to no challenge to their status, but that is all about to change.

A recent California Supreme Court ruling, as well as a handful of state and local ordinances have made a strict interpretation of who can – and who cannot – be called an entrepreneur. Washington State even produced a “step by step guide” for companies to classify and hire their workers with the appropriate classification. Although the exact rules differ slightly from region to region, there is a common thread between them: fewer workers can now legally be paid as independent contractors.

Employee or independent contractor?

Here is the simplest interpretation of the applicable law and the law of the adjacent state. A worker should be classified as an employee if he meets one or more of these traits (actual language varies by decision or law):

Is the work of the worker at the heart of your business?

Couriers, for example, would view drivers and delivery people as the “core” of their business and would not be able to classify these workers as independent contractors under the new rules.

Are you directing the way the job is done?

If your process bring in new workers includes formal training with brand or company specific procedures or if you control the details of what they do it can be considered an employee / employer relationship.

Are your workers doing the work at your site?

Although it is not always a determining factor independent entrepreneur status, a worker who has his own home office and sees it as his legal establishment can sometimes be considered an entrepreneur.

Who pays the labor costs?

Employees typically don’t pay site rent, buy their own supplies, or pay for things like business insurance or company vehicles. The burden of spending on employees should fall on employers.

Why it matters

Labor rights groups applaud rule changes, saying upgrading contractors to employees gives workers access to benefits they previously did not have, such as health insurance provided by the employer, the payment by the employer of social charges, paid vacation, labor protections and additional civil liability cover (such as industrial accident insurance.)

Opposition to the changes says it limits flexibility in hiring, makes it more expensive to hire workers and has led to a reduction in the total wages and benefits paid to workers. In some cases, fewer workers are hired.

What do the workers think?

The reaction is mixed here as well. This LA Times article shares a few stories of workers who were previously classified as contractors are now seeing their overall earnings drop as a result of the decision. It should be noted that experiences will vary depending on occupation, industry and how employers decide to respond to the rising costs of hiring workers as employees.

Independent contractors have also generally been able to deduct certain expenses, such as mileage and health insurance premiums, from their taxes, which employees are not able to do. This change alone could create a different tax situation for workers, although employees will now pay their share of what has been dubbed the “self-employment tax”. It is still too early to say whether this movement will translate into a net gain in benefits, wages, protections and opportunities for workers.

Beware of future changes

If there’s one takeaway here, it’s that everything we know about hiring independent contractors is changing. If you only hire a few 1,099 workers to do jobs unrelated to your business (hiring a cleaning service to sweep your barbershop, for example), you’ll probably be fine. If you rely heavily on a team of trained professionals who provide the same services that your business markets and sells (a team of writers for your publishing house), be prepared for some of these changes to happen in a neighborhood near at your house.

This article was originally written on February 28, 2019 and updated on May 21, 2020.

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