- Hi everyone.
I'm attorney Aiden Durham with 180 Law Co. in Colorado.
And you are watching all up in your business.
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On this episode of All Up In Yo Business
we're gonna continue the conversation
about the differences between independent contractors
and employees.
But, before we get into it,
please be sure to like, subscribe and share,
and check the description
for links to additional information and resources.
In my last video, we talked about how the IRS determines
if someone is an independent contractor or an employee.
Quick summary, it comes down to the degree of control
the company has over the worker
and the independence that the worker exercises.
As I mentioned in that video,
not only do we have to be concerned about the IRS
and the federal government's laws and rules
regarding worker classification,
but we also have to worry about the state's laws.
As an employer or company,
if you hire somebody to do work for you
you must be sure to properly classify that worker
as either an employee or an independent contractor.
If you misclassify an employee as an independent contractor
you could be liable to the IRS for employment taxes.
You could also be liable under state laws
in terms of minimum wage or meal and rest breaks.
You could also be liable under federal law
with regard to the fair labor standards act.
You also risk being liable
for things you may not have anticipated or planned for
such as workers' compensation or vicarious liability
for the actions of the employee.
So, needless to say, it is really important
that you understand the differences
between an employee and a contractor
so you can properly classify the people who work for you.
Generally speaking, there are two different types of tests
that are used to determine
if a worker is an independent contractor or an employee.
There's the common law test and the ABC test.
The IRS rules that I discussed in the last video
fall under the common law test.
Which looks at the behavioral control, financial control
and the relationship of the parties.
The ABC test uses three factors that are, in some ways,
very similar to the common law test.
But the ABC test focuses on
whether there's an absence of control,
if services provided by the worker
are related to the services provided by the company
and if the worker is customarily engaged
in an independent trade or business.
Each state has its own laws regarding worker classification
and what makes somebody an independent contractor
versus an employee and their own laws regarding the rights
of employees and contractors.
Some states use a variation of the common law test,
and some use a variation of the ABC test,
and some use a little bit of this and a little bit of that.
But even though two states may use the same test,
the exact way that the test is applied in a given situation
or the way it's spelled out in the states laws
will look very different from state to state.
And in most cases,
we need to focus on the laws of the state
where the worker is located,
not just the state where the company is located
or registered.
So that's what we're gonna cover this time around.
Since each state has its own set of laws and rules
I obviously cannot go over the laws of all the states.
I'm gonna focus on Colorado and California.
Colorado because that's where I'm licensed
and where my law practice is based,
and California because that's where I live,
and because it was a hot topic over recent years.
To be clear,
I am not licensed to practice law in California.
I live in California
and I operate my business remotely from California,
but I am a Colorado lawyer and a Colorado based law firm.
If you have questions
about properly classifying your workers,
you should definitely consult with an attorney
who is licensed in your state.
Let's start with the great state of Colorado,
since that's where I'm licensed
and those are the laws that I deal with most often.
Colorado uses kind of a variation of the ABC test
and focuses on the degree of control,
and if the worker is engaged in an independent business.
Our statute in Colorado says, in part,
"Any individual who performs services for pay for another
"shall be deemed to be an employee
"unless the individual is free from control and direction
"in the performance of the service
"and such individual is customarily engaged
"in an independent trade, occupation, profession
"or business related to the service performed."
So, in other words, employee is the default classification.
Anybody who performs a service for another
is by default considered an employee
unless they are free from control and direction
and are customarily engaged
in an independent trade occupation, profession or business.
Just like with the IRS,
there are a number of different factors
that are taken into account
to demonstrate if the worker is working independently
and free from control and direction.
It must be shown that the company,
the one for whom the services are being performed,
does not require the individual
to work exclusively for the company,
does not establish a quality standard for the worker.
The company can provide plans and specifications
regarding the work,
but they can't oversee the actual work
or instruct the worker as to how the work will be performed.
The company doesn't pay a salary or an hourly rate,
instead of a fixed or contract rate,
doesn't terminate the work of the worker
during the contract period
unless the worker violates the terms of the contract
or fails to produce a result
that meets the specifications of the contract.
The company doesn't provide more than minimal training,
doesn't provide tools or benefits to the individual,
doesn't dictate the time of performance
except maybe a completion schedule
and a range of negotiated and mutually agreeable work hours,
doesn't pay the worker personally,
instead of making payments
to the trade or business name of the worker,
and does not combine the business operations of the company
instead of maintaining all such operations
separately and distinctly.
Now, you don't necessarily have to satisfy
all of those factors.
Just because one factor is missing
doesn't automatically mean the worker is an employee.
And if there's a written contract between the parties
that describes the existence of those factors,
then that contract can be used to demonstrate
that the relationship is that of an independent contractor.
The contract can also create a rebuttable presumption
that the worker is an independent contractor
if the contract includes a disclosure
that the worker won't be entitled
to workers' compensation benefits
and is obligated to pay federal and state income taxes
on the money paid to the worker.
That means that if the contract States
that the company won't require the worker
to work exclusively for them,
won't provide more than minimal training,
won't dictate the time of performance and so on,
and that the worker has to pay their own income taxes
and won't receive benefits of workers' compensation,
then it's presumed that the worker
is an independent contractor.
But that's a rebuttable presumption.
Meaning that it will be taken as true
unless somebody else tries to contest it
and proves otherwise.
It depends on the actual facts of the relationship,
not just what the contract says.
It doesn't matter if the contract says
I'm not gonna provide more than minimal training,
if I am actually providing a lot of training.
Just because the contract says
I'm going to treat you like an independent contractor
doesn't mean that I am, in fact,
treating you as an independent contractor.
Now, let's talk about California.
California was a hot topic over recent years
due to their enactment of Assembly Bill 5 or AB 5.
People really got their panties in a bunch
because California changed the way they determined
independent contractor and employee classification.
California uses the ABC test.
It's not like this is something brand new or groundbreaking.
Plenty of other States also use some variation
of the ABC test.
The idea was that AB 5, this change, would make it easier
for employers and workers to determine in advance,
if a worker is an independent contractor or an employee.
Previously, they used a 13 factor test
that considered all potentially relevant facts
where no single factor would control.
That test, called the Borello test,
or maybe it's pronounced "boreo",
I'm not sure.
Anyway, it was pretty similar
to the common law tests that the IRS uses.
It focused on things like
if the worker holds themselves out
as being engaged in occupation
distinct from that of the employer
who provides supplies and tools for the worker,
if the worker has invested in its business,
if the services provided requires a special skill and so on.
They would take all of the 13 factors into consideration
but no single factor would control the determination.
The ABC test on the other hand has three factors.
And if one of those factors does not exist
then the worker is not an independent contractor.
So under the ABC test, a worker is considered an employee,
and not an independent contractor,
unless the employer or the company doing the hiring
satisfies all three of the following conditions.
Number one, the worker is free from control and direction,
two, the worker performs work
that is outside the usual course of the company's business,
and three, the worker is customarily engaged
in an independently established trade occupation or business
of the same nature that involves the work performed.
So, comparing that to the common law test
that the IRS uses,
the ABC test really isn't all that different.
They both ask questions about the behavioral control
that the company has over the worker,
the work that the worker performs
compared to the nature of the company's business,
and if the worker is engaged
in an independent trade or business.
The only real significant difference
is that the ABC test says all of these things are important
and if one of these things is missing, then employee,
whereas the common law test is more like
"All of these things are important
"but just because one thing might be missing
"doesn't automatically mean employee."
AB 5 also carves out exceptions
for certain types of professions and other circumstances
where they might still apply that multifactor Borello test
instead of the three factor ABC test.
There are exceptions in some circumstances
for people like freelance writers, photographers,
and videographers,
certain occupations in the music industry,
and some bonafide business to business relationships.
There are other requirements
that you sometimes have to demonstrate
before you can use that multi-factor test
instead of the ABC test,
but the point is that the ABC test does not strictly apply
to all situations and all workers
a hundred percent of the time.
The other important takeaway here
which is true in both Colorado and California
and actually true with regard to the IRS
and other federal laws too
is that the burden of proof is on the employer
or the hiring entity.
It's up to the company doing the hiring, not the worker,
to demonstrate and prove
that the worker is an independent contractor
and not an employee.
You as the worker won't get into trouble with the state
or federal governments
if you are misclassified as an independent contractor
when you're really an employee.
It's the company's responsibility
to make sure they are properly classifying their workers.
I'm gonna close this episode out
by quickly addressing a question
that I've seen pop up a few times in the comments and stuff.
If I am the worker
and I want to be an independent contractor,
I want that freedom and ability
to control and dictate my schedule, my work, my life,
how do I make sure
that I don't fall into that category of employee?
I've said before that being an employee or a contractor
is not a choice that you get to make.
The employer doesn't get to choose
if a worker is an employee or not,
and the employee doesn't get to choose
if they're treated as an independent contractor or not.
That determination is based on
the facts of the relationship.
Well, that is correct.
It's not a choice that either party gets to make.
It's kind of incorrect
in the sense that you do get to choose how you act
and how you provide services to other people
and other companies.
The best way I can explain it is this.
If you wanna be treated like an independent contractor
then you have to act like an independent contractor.
Act like an independent business owner
because that's what you are.
Do the things that a business would normally do.
Maybe you operate as an LLC or a corporation,
have a service contract with your clients
that defines the scope and nature of your relationship,
market and advertise your services,
take risks and invest in your business,
set boundaries with regard to your work
and say no to people who try to treat you as an employee.
I, as a self-employed lawyer,
I'm an independent contractor to my clients.
If one of my clients was like,
"Hey, Aiden, I need you to be available for me more
"and stop working with your other clients.
"I want you to dedicate 40 hours a week
"to helping my business instead."
Or if they were like,
"Hey, Aiden, I know our contract says
"that you're only going to do this one project
"but I need you to do this other project instead,
"and I need you to have it done by tomorrow,
"and I need you to use this specific program
"when you do it," I would reply with no thank you.
That's not how I operate my business.
I'm happy to help you
but I'm only going to do so on my terms.
So that's the answer.
If you wanna make sure
you're treated as an independent contractor,
then you need to make sure you act
like an independent contractor.
If you are operating a business
and need help with determining if your workers
are independent, contractors or employees
please contact an attorney who is licensed in your state.
As you can see, the laws are different in every state
and will apply differently in every situation.
There is no one-size-fits-all answer.
If you're an independent contractor
and wanna make sure you stay in an independent contractor
then contact a lawyer in your state
who can help you manage the legal side
of your business operations.
And finally, if you're a worker
who thinks your employer is misclassifying you
as an independent contractor
when you might actually be an employee,
then, can you guys guess what I'm about to say?
Contact a lawyer who's licensed in your state.
That's all for this episode folks.
Drop a comment below, let me know what you think,
and again, don't forget to check the description
for links to additional information and resources.
Thank you all so much for watching.
I'm Aiden Durham and I'll see you next time.
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