Are you aware of the new ABC test for independent contractors in San Diego and throughout California? Is there a reason why you should consider the immediate review of any existing independent contractor agreements in San Diego? What are the new changes and the “ABC Test” associated with the recent California Supreme Court decision and how can they actually threaten the life of your business?
Employers Take Note: The Classification of Workers in California Has Substantially Changed
The California Supreme Court recently handed down a game-changing opinion in the Dynamex case which will forever change the nature of workers and employees across San Diego and throughout all of California. It is important to immediately review independent contractor agreements in San Diego in light of these new developments and perhaps even reconsider your overall business strategy as it relates to independent contractors.
The first major change associated with this landmark case is the establishment of a new legal presumption that all workers in California are considered to be employees, unless an employer can prove an independent contractor relationship exists based upon the ABC test below. The burden of proof is now upon your shoulders as a California employer.
A New ABC Test for Independent Contractors in San Diego and Across California
The decision establishes a new ABC test for independent contractors in San Diego and throughout California that requires any business, entity or individual providing work to a 1099 worker or independent contractor to prove:
- “that the worker is free from control and direction over performance of the work both under the contract and in fact.” and
- “that the work provided is outside the usual course of the business for which the work is performed,” and
- “that the worker is customarily engaged in an independently established trade, occupation or business.”
Most existing independent contractors will fail the second condition above, resulting in the risk of misclassification of independent contractors who should actually be “employees” under the new law. A simpler way to look at this issue might be:
If an independent contractor is contributing to the production and profitability of your company you will in all likelihood fail the ABC test.
Stiff Penalties for the Misclassification of Independent Contractors
The penalties for misclassification of independent contractors are extremely high and simply cannot be overstated. The Court has established a four year “look-back” period which opens the door for any provider of work to be liable for up to $25,000 in civil fines, per instance, as well as all of the back federal, state and local payroll taxes which should have been collected over the look-back period. In addition, your company would be required to pay unemployment, workers compensation and Social Security for the same period. These penalties quickly add up to six figures for each independent contractor, even if they only have a moderate income.
The next knock on your door may involve a Private Attorneys General Act (PAGA) lawsuit seeking unpaid overtime, unpaid vacation leave, and compensation for all benefits provided to employees which were not available to the independent contractor (such as health insurance) for a look back period covering several years.
These cases have resulted in severe financial consequences often resulting in the closing of the company itself.
Protect Your Interests as a San Diego Employer with 1099 Workers
We invite you to review the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today. We will review your existing independent contractor agreements in the light of the new ABC test for independent contractors in San Diego and throughout Southern California and help to develop a strategy to protect your interests going forward, while minimizing as much as possible your risks associated with the past.