Independent Contractor or Employee? The Costly Consequences of Misclassification

Businesses often prefer to hire independent contractors over employees due to the cost savings, flexibility, reduced liability, and lower administrative burden. However, misclassifying workers as independent contractors instead of employees can result in significant consequences, especially with the introduction of California Assembly Bill 5 (AB-5) in 2020.

AB-5 created a new test, the “ABC test,” for determining whether a worker should be classified as an employee or an independent contractor. Under the ABC test, a worker is presumed to be an employee unless all three conditions are met: the worker is (1) free from the control and direction of the hiring entity, (2) performs work outside the usual course of the hiring entity’s business, and (3) is customarily engaged in an independently established trade or business.

Employers who misclassify workers face penalties, including back taxes, unpaid wages, fines for violating labor laws, and even criminal charges. Misclassified workers lose access to benefits such as minimum wage, overtime pay, workers’ compensation, and unemployment insurance.

Although AB-5 has faced legal challenges and revisions, it remains an important consideration for employers and workers in California. It is crucial for businesses to classify their workers correctly to avoid the costly consequences of misclassification.

If you are unsure whether you are correctly classifying your workers, it is important to consult with legal and tax professionals to understand how AB-5 applies to your specific situation. Don’t risk your business and the livelihood of your workers. Set up a consultation and let’s find out if you are correctly classifying your workers as independent contractors or employees:

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Disclaimer: This article is for educational purposes only and is not intended as legal advice. Everyone’s situation is different, consult with a lawyer at Cooper & Huber, LLP to understand how to best navigate for you.

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