Businesses that are concerned about the overreach of taxes and regulations from the state government continue learning how hostile California is to business owners. On April 30, 2018, the California Supreme Court advanced its assault by further limiting the definition of independent contractors.
If you are a small or medium-sized business, you recognize the value of working with independent contractors as opposed to employees. With independent contractors, you are not expected or required to provide benefits. You have no obligation to pay withholding taxes or, in Nevada, the Modified Business Tax in relation to independent contractors’ wages. There is no question of minimum wage or overtime. There is no requirement for workers’ compensation insurance. Additionally, your ability to end your relationship with an independent contractor may be much simpler than that of an employee.
In previous articles, we have discussed the differences between independent contractors under Federal Law and Nevada Law. If you would like to learn more, please read here. However, California has just made the definition of independent contractor far narrower.
Under the new California standard, for a worker to be an independent contractor, the business must prove what is known as the “ABC” test:
- It does not control how the individual performs work
- The individual provides a service that is not part of the employer’s usual business
- The individual customarily engages in an established business, trade or profession that is independent of the employer’s business.
In this scenario, the business must prove all three of the above in order to have the worker conclusively be considered an independent contractor. The ruling will have a disproportionate effect on startup and high-tech business that have grown accustomed to the use of independent contractors instead of employees.
Although Nevada has tightened its rules regarding classifications of independent contractors, it still remains a state that affords greater protections and benefits for businesses. Nevada is a business-friendly state. As a business lawyer who is licensed in both California and Nevada, the recent California Supreme Court decision just gives me one more reason to advise clients to utilize the benefits of Nevada for their businesses.