There was a very important California Supreme Court ruling last year regarding the definition of an Independent Contractor (IC). In April 2018, it adopted a rigid “ABC” test for determining whether or not an individual qualifies as an Independent Contractor or, in fact, is an employee. In order to qualify as an Independent Contractor, the individual must:

A. Be free from the control/direction of hiring entity with respect to the work performed, per contract and in fact; AND

B. Perform work that is outside the usual course of hiring entity’s business; AND

C. Is customarily engaged in an independently established trade, occupation or business of same nature as work performed for the hiring entity.

While A and C have long been requirements for an Independent Contractor, B is new and may be the most difficult to meet.

The penalties for mis-classifying an employee as an Independent Contractor can be substantial. Probably the most significant penalty would be having to pay back taxes. Per the IRS, an employer can be subject to paying back takes of as much as 41.5% of the contractors' wages, and the penalties can go back for up to three years. (The independent contractor may also be audited and forced to repay any business deductions taken during that time.) The Department of Labor can require you to pay back wages for up to three years and can levy fines for improper record keeping. They may also conduct an audit to see if there are any other individuals in a similar situation, and/or any other wage and hour violations. The state insurance agencies may seek back payment on unemployment and workers comp premiums. If the IRS thinks you intentionally mis-classified workers they can seek a criminal conviction with up to a year in jail and a fine up to $500,000 for the corporation.

Given the potential liability, It is recommend that you review carefully any Independent Contractor Agreements. Some strategies might include:

A. Not engage a former employee as an IC

B. Not engage an IC who recently was an employee anywhere else;

C. Not be an IC’s first customer/client

D. Not engage an IC to perform the same work as an employee

E. Not prohibit an IC from working for other companies

F. Not provide training to an IC

G. Not attempt to control how, where or when work is performed

H. Not provide tools or equipment

I. Not reimburse for business expenses

J. Be careful converting an IC to an employee