For years many companies have utilized independent contractors to supplement their employee workforce.  They can bring a unique skill set to a project and then when the project is complete they move on.  However, companies also see them as a significant way to reduce labor costs.  Since they are not employees, companies do not need to pay FICA and unemployment taxes, employee benefits or workers compensation insurance for these workers, which can add 30% or more to an employee’s cost.  The state and federal governments, however, struggle with the lost tax revenue and continue to take increasingly aggressive positions to classify these workers as employees.  Now California has taken drastic steps with a new law that could change how more than two million workers are classified.

Historically, states have followed the IRS guidance on classifying workers as employees or contractors.  This guidance has changed over the years, but the current position is that if the company directs and controls how, when and where the work is being done, then the worker is an employee.  Conversely, if the worker is given a project and a deadline and can work how, when and where they decide, then they are contractors.

In the aftermath of a California Supreme Court decision, the state Assembly recently passed a bill that would potentially create a significant change for workers.  While is still needs to pass the state House and be signed by the governor, this bill creates a three criteria for determining whether a worker is a contractor, known as the ABC test.

1. CONTROL – Similar to the current IRS criteria, the company does not direct how the work is performed.
2. SCOPE – The work is in a field different from the hiring company’s business.
3. INDEPENDENCE – The worker operates a business doing the same kind of work performed for the hiring company.

This will have a significant impact on the technology industry, which employs many contractors who work in their offices side by side with employees, but they are not alone.  While the bill will exempt some professions, such as doctors, lawyers, accountants and consultants, it will have far reaching implications.  Businesses have already warned that they would need to pass these higher labor costs onto consumers by raising prices.  For now, we will have to wait and see the final form of this new law and how quick other states follow California’s lead.  However, this has the potential to drastically change the employment landscape.

For more information on this and other regulatory compliance issues impacting your company and employees, contact John Morlock at 800-836-9678 or email at jmorlock@ttspro.com.  Total Team Solutions provides human resource outsourcing services to small businesses in Connecticut, New York and Massachusetts.  Whether you need payroll services, more cost effective employee benefit plans or human resource advice with regards to employee hiring, performance, classification or compliance, Total Team Solutions can help.