Tax Insights

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California’s New Definition of an Employee

California’s new law (Labor Code section 2750.3) creates a big change on who should be paid as an independent contractor and who should be paid as an employee. Under the new law, a worker can only be considered an independent contractor if the payor can prove they meet the following three requirements:

  1. The worker must be free from control of the payer in connection to the performance of the work.
  2. The worker must perform work outside of the work normally performed by the payor.
  3. The worker must be engaged to perform an established trade or business in the same nature of work as the payor.

All businesses within or outside California that are currently paying independent contractors that live or work within California will be affected by the new law.

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The purpose of the law is to get more workers classified as employees rather than independent contractors which will ultimately increase the tax revenue within the state and the benefits provided to workers.

Businesses who are affected should prepare themselves and be ready to prove whether their current independent contractors meet the three tests listed above. If the businesses have workers who do not meet the requirements, they should be ready to take the necessary steps to hire them as an employee. The new law is effective January 1, 2020, so the changes should be made by that date if applicable.

Please consult your attorney with any questions regarding classifications of employees. California law requires this advice to come from an attorney only.

If you have any additional questions please contact your Henry+Horne tax advisor.

KC Kolb, CPA