New California Ruling changes test for Independent Contractors

Are you classifying the people who work for you properly? I work with lots of entrepreneurs and small business owners, and I'm struck by how often people assume that just calling someone an independent contractor is enough to make that the case.

It's especially common with small independent films and theatre projects. Producers often include provisions in their contracts stating that the work is being performed by an independent contractor, who agrees to take responsibility for all taxes, workers' compensation, and other obligations.

But wishing it, or even contracting it won't make it so.

In 2012, shortly after California legislated some harsh penalties for misclassification of workers, I wrote about the so-called “Control test” which examines the degree of control the employer has over the worker in a number of areas.

Independent Contractor vs. Employee – misclassification can cost entertainment industry employers dearly.

New Supreme Court Ruling

But earlier this week, that changed. On April 30, 2018, California Supreme Court rendered its decision in Dynamex Operations West, Inc. v. Superior Court, and clarified the standard for determining whether workers should be classified as employees or independent contractors. The Court held that there is a presumption in favor of treating workers as employees, and that an independent contractor classification places a burden on the company to establish that it is proper under the so-called “ABC test”, which has been adopted in some other jurisdictions.

The ABC Test

Under this ABC test, the hiring entity must establish all of the following:

A. That 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, and in fact; and

B. That the worker performs work that is outside the usual course of the hiring entity's business; and

C. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

What it means

This can mean trouble for folks in entertainment, since workers in the production business are typically working under the direction of the producer and doing work that is within the usual course of work (i.e., production). So, if you've operated using independent contractors as crew, cast, etc., you'll want to look harder at this issue in the future.

The issue most often comes to a head after a worker seeks unemployment compensation after a job ends. That application can trigger an audit. The same can occur when a worker is injured and seeks Worker Compensation coverage.

Care should be taken to properly classify workers and thus avoid fines, penalties which can range from $5,000 to as much as $25,000 per violation.

If you're a worker and you prefer to be classified as an independent contractor, the best way to handle things is by forming a loan-out corporation

Article: Should You Have A Loan-Out Company for your work in entertainment?.

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