CalNonprofits Insurance Services

UPDATE on Independent Contractors Classification

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The classification of independent contractors has always been fraught with uncertainty and interpretation. The California Supreme court has dramatically clarified and narrowed the definition of those workers that can still be considered independent contractors. Under the new guidelines, all workers in the organization are considered employees unless all three prongs of the “ABC Test” can be met –

  1. The worker is free from the control and directionof the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact, AND
    B. The worker performs work that is outside the usual courseof the hiring entity’s business, AND
    C. The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.

If a worker does not meet ALL three of these prongs, they are not an independent contractor! Prong B will likely be the most difficult for nonprofits to prove – if the work being performed furthers your mission and purpose, the worker is an employee and cannot be classed as an independent contractor. You should seek legal counsel if you have any question about your particular situation. Here are some hypothetical situations –

1) Day care organization that hires an independent IT consulting firm to install computers, servers, and firewalls and provide technical support to the organization. This would likely pass the ABC test to be considered an independent contractor  

  1. The consulting firm is directing and controlling when and how the work is being done, AND
    B. Installing computers, servers, firewalls and providing tech support are not in the usual course of business for the day care center, AND
    C. The IT consultant is an independently established business that performs IT work for other business.

2) A food bank hires an interim Executive Director while they search for a new Executive Director. This situation would likely fail the ABC Test – particularly B – the work being performed is definitely inside the usual course of business for the food bank. The ED is furthering the mission and purpose of the organization.

3) An arts council contracts with a professional fundraiser to raise funds for their capital campaign. This situation would likely fail the ABC Test B – the work being performed is part of the usual course of business for a nonprofit.

AB5 which was signed on September 18, 2019 and makes the ABC test law. There are over 50 occupational exemptions (meaning the previous rules to determine independent contractor status still apply) mostly those occupations that require a license such as lawyers, doctors, contractors, and some professional services.  There are also some business-to-business exemptions and referral agency exemptions and they both have their own set of specific requirements to meet the exemption.

This ruling pertains to California Wage Orders, which means that as employees, the workers are entitled to minimum wage, overtime, meal and rest breaks, paid sick time, expense reimbursement and other forms of compensation. Don’t forget to consider how additional employees will affect your compliance with the Affordable Care Act (ACA).  Also, the state will be looking for the employment taxes for these employees and workers’ compensation carriers will be collecting premiums. We strongly urge you to seek legal counsel on your independent contractor contracts. This article should not be construed as legal advice.

We value our nonprofit clients, and for this reason provide a complimentary subscription to ThinkHR, your go-to HR and compliance resource. ThinkHR is a great resource for keeping abreast of changes to HR laws, and you will receive automatic policy alerts (policy alerts will be a link to the ThinkHR California Law Alerts) if you have created a Living Handbook.   If you do not know your login credentials try logging in with your email and “password”. If that does not work please request your login credentials by emailing marketing@cal-insurance.org. If you have questions about ThinkHR contact your account manager.

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Additional reading

AB5 is Law – Now What?
Changes to Independent Contractor Status
Nonprofits need to check their contracts

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