Generally speaking, an independent contractor is someone who has control over their own work, including their schedule, fees, client basis, assignments, and other business operations. An employee, on the other hand, is subject to the control of their employer.

The lines are not always clear between an employee and an independent contractor, but the key factor is the amount of control the paying entity, whether that be a person or company, has over the worker.

To know whether you qualify as an employee or an independent contractor under California law, reach out to the team at Starpoint Employment Law for a full evaluation.

Not only can we help you determine your employment classification, but we can help with employment-related legal issues, such as unpaid overtime or wrongful termination.

Why Does Employment Classification Matter?

A worker’s rights, protections, and obligations under the law differ if he or she is an independent contractor vs an employee.

Legal Protections

California employees have much stronger legal protections and rights than independent contractors.

Under federal and state law, employers must provide employees with the following benefits:

Overtime pay,
Minimum wage,
Meal breaks,
Safe working conditions,
Unemployment insurance,
Health insurance,
Retirement benefits,
Social Security and Medicare (FICA taxes),
Workers’ compensation insurance, and
Family and medical leave.

Employees also enjoy protections under both federal and state anti-discrimination laws.

Thus, misclassification by an employer can deprive you of your legal rights and leave you missing out on thousands of dollars in unpaid wages. That’s why it’s important to know whether you are an employee or an independent contractor.

Tax Filings

When an entity hires someone, it needs to properly classify that worker as an employee or independent contractor to comply with its federal tax filing obligations.

For employees, the employer must provide a Form W-2 and withhold income taxes, withhold and pay FICA taxes, and pay unemployment tax.

Independent contractors, on the other hand, must file a Form 1099 and do not have those taxes withheld or paid by the company they’re providing services for. Rather, the independent contractor is responsible for making those tax payments.

Are You an Employee or Independent Contractor?

Employment status tests and criteria differ based on who is making the determination and for what purpose. However, the overarching factor is the amount of control the hiring entity has over the worker.

California Tests

In California, the applicable test for determining an independent contractor vs employee depends on the purpose of the determination.

ABC test

California’s “ABC” test applies to cases brought under the state’s wage orders, which are regulations that govern wages, hours, and working conditions for certain industries.

Under the test, there is a presumption that a worker is an employee unless the employer can prove otherwise.

To rebut the presumption, the employer must show:

The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
The worker performs work that is outside the usual course of the hiring entity’s business; and
The worker customarily engages in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

There are plenty of exceptions to the general rule, but California favors employee status.

“Manner and means” test

The ABC test does not apply in every context, particularly when it comes to licensed professionals. The manner and means test is the fallback and looks at whether an employment relationship was ever created between the parties.

An employment relationship exists when an entity hires a person to perform some type of benefit, such as a service. The hiring entity can be an individual, a company, or a governmental agency.

California courts look at the amount of control the hiring entity has over the manner and means of the worker doing the job.

There are many secondary factors that the court will consider, such as:

Whether the worker is under supervision,
Whether the worker can be fired at any given time,
Whether the worker provides his or her own equipment, and
Whether the worker performs the same types of jobs for other hiring entities.

The courts look at the totality of all the factors in making their determination.

California’s test under anti-discrimination laws

Independent contractors do not have anti-discrimination protections under California’s Fair Employment and Housing Act (FEHA).

FEHA has its own definition of an independent contractor, which is someone who:

Has right to control the performance of the contract for services and discretion as to the manner of performance;
Is customarily engaged in an independently established business; and
Has control over the time and place the work is performed, supplies the tools and instruments used in the work, and performs work that requires a particular skill not ordinarily used in the course of the employer’s work.

The test is similar to the manner and means test, but there is more weight on the worker’s skills and business independence.

Federal Tests

When the IRS is determining employment status, the focus is on the business relationship between the person paying and the person performing the work.

By using common law rules, the IRS considers all facts and information that shows the degree of control and independence between the two parties.

The IRS classifies evidence into three different categories: behavioral control, financial control, and the relationship of the parties.

Behavioral control

If the company paying can decide and direct the final result of the work, but the worker has the authority to decide how and when the work will be done, that person is likely an independent contractor.

Financial control

Facts that fall under this category show whether the company can direct and control the financial aspects of the job.

For example, the IRS may look at whether the worker was reimbursed for business expenses and whether the worker was offering his or her services in the open market.

Relationship of the parties

Here, the IRS looks at how the parties interacted with each other. They consider evidence like written contracts between the worker and paying entity that describe the nature of their relationship.

The IRS may also look at whether the entity was providing employee benefits, such as insurance, overtime pay, etc.

The IRS states that there is no set number of factors that make someone an employee or independent contractor. Weighing all factors and evidence is the key to making the determination.

Workers and employers can request that the IRS make an employment status determination by filing a Form SS-8. This can take at least six months.

Penalties for Misclassification

Under California’s Labor Code, it is unlawful for any person or employer to willfully misclassify someone as an independent contractor.

“Willful misclassification” occurs when an employer voluntarily and knowingly misclassifies an individual as an independent contractor to avoid employee status obligations.

The California Labor and Workforce Development Agency may impose a civil penalty of $5,000-$15,000 for each violation upon an employer who willfully misclassifies an employee.

If the Labor and Workforce Development Agency, or a court, determines that the employer is exhibiting a “pattern or practice” of willful misclassification, the employer may be subject to a civil penalty of $10,000-$25,000 per violation.

Further, the employer may owe interest on any amount they owe to the employee as a result of the violation. Employers may also be required to display on their website that they committed a serious violation of the law.

The IRS goes a few steps further in penalizing wrongdoers. Anyone who willfully attempts to evade or defeat any federal taxes may:

Be found guilty of a felony;
Fined up to $100,000 for individuals and $500,000 for corporations; and
Imprisoned up to five years.

Any or all of these penalties may be imposed.

What to Do If You Have Been Misclassified as an Independent Contractor in California

By being misclassified as an independent contractor, you may be missing out on wages and other employment-related benefits.

Under Section 2802(a) of the Labor Code, employers who misclassify employees as independent contractors must indemnify them for all unpaid wages and employment benefits. Depending on your situation, there are several options.

The first step is to contact a California employment law attorney who can help you determine your employment status and explain your rights.

Next, you may consider speaking with your employer or the person paying you about your classification.

If you were fired or laid off from your job, consider filing an unemployment claim with the Employment Development Department.

If you suffered an injury while on the job and were improperly misclassified as an independent contractor, you may file for workers’ compensation with the California Department of Industrial Relations.

Contacting the IRS about your misclassification is a good idea since the tax consequences can be severe. This can be done by submitting a Form SS-8.

If you believe you should have been classified as an independent contractor, you can file Form 8919 to report uncollected FICA taxes.

If you believe you are owed overtime because of your status as an employee, you may file a wage claim with the Division of Labor Standards Enforcement.

You may also be able to recover attorney fees and court costs associated with enforcing your rights against your employer.

Contact a California Employment Law Attorney Today

Whether you need assistance determining your employment classification or you want to enforce your rights by filing a claim, at Starpoint Employment Lawyers we are here to help.

Call us at (310) 882-7868 or contact us online today for your free consultation!

Aidin Ghavimi

Aidin is a partner at Starpoint LC, Attorneys at Law, and focuses on personal injury and employment law cases in and around Southern California. He earned his Juris Doctorate from the Loyola School of Law and his Bachelor’s from USC. Aidin’s primary goal is to bring justice to his clients and to ensure they are able to move on with their lives after a serious injury.

California Independent Contractors vs. Employees

Independent Contractor vs. Employee