There was a time, not long ago, when businesses in every industry grew with the labor and talent of workers classified as independent contractors. Even before the “gig economy” and “side hustles” were buzzed about (and companies like Lyft and Uber made them newsworthy) small businesses everywhere relied heavily on contract workers provide the bulk of their services. Hairdressers, construction workers, writers, and dog walkers were all classified as independent contractors with little to no challenge to their status, but all of that is changing.
A recent California Supreme Court ruling, along with a handful of state and local ordinances have made some strict interpretation of who can—and who can’t—be called a contractor. Washington state has even produced a “step by step guide” for businesses to classify and hire their workers with the appropriate classification. While the exact rules differ slightly from region to region, there is a common thread between them: fewer workers are now legally able to be paid as independent contractors.
Can’t get enough?
We've got tons of FREE business tools and resources right here.Learn more
Employee or Independent Contractor?
Here’s the simplest interpretation of the ruling and adjacent state law. A worker must be classified as an employee if it meets one or more of these traits (actual language varies by ruling or law):
Is the worker’s job central to the core of your business?
Courier services, for example, would consider the drivers and delivery personnel to be “core” of their business and wouldn’t be able to classify these workers as independent contractors under the new rules.
Do you direct the way the work is done?
If your process of bringing new workers on includes a formal training with brand or company-specific procedures or you have oversight on the details of what they do, this may be considered an employee/employer relationship.
Do your workers perform the work at your location?
While not always a factor in determining independent contractor status, a worker who has their own home office and considers it their legal place of business may sometimes be considered a contractor.
Who pays the expenses for working?
Employees typically don’t pay location rent, buy their own supplies, or pay for things like business insurance or company vehicles. The burden of expenses for employees should fall to the employers.
Self-Employed PPP Loan Forgiveness Calculator - Estimated your Forgivable Amount
Use this calculator if you are self-employed with no employees and filed or will file Schedule C for 2019.Get Estimate
Why This Matters
Labor rights groups are cheering the changes the rules, stating that reclassification from contractors to employees gives workers access to benefits that they didn’t have before, such as employer-provided health insurance, payment of the employer portion of payroll taxes, paid time off, labor protections, and extra liability coverage (such as worker’s compensation insurance.)
Opposition to the changes states that it limits flexibility in hiring, makes hiring workers more expensive, and has led to a reduction in the total overall wages and benefits paid to workers. In some cases, fewer workers are being hired.
What do the workers think?
Reaction is mixed here, too. This L.A. Times article shares some stories of workers who were previously classified as contractors are now seeing dips in overall earnings because of the ruling. It should be noted that experiences will vary by occupation, industry, and how the employers decide to react to the rising costs of hiring workers as employees.
Independent contractors have also generally been able to deduct certain expenses, such as mileage and health insurance premiums, from their taxes – something that employees aren’t able to do. This change alone could create a different tax situation for workers, even though employees will now be paying their portion of what has been dubbed the “self-employment tax.” It’s still too early to tell if this movement will result in a net gain of benefits, wages, protections, and opportunities for workers.
Beware of Future Changes
If there is any takeaway here, it’s that everything we know about hiring independent contractors is changing. If you only hire a few 1099 workers to do jobs completely unrelated to your business (hiring a cleaning service to sweep up your barbershop, for example), you’ll probably be OK. If you rely heavily on a team of skilled professionals who carry out the same services your business markets and sells (a team of writers for your publishing company), be ready for some of these changes to come to a neighborhood near you.
Pull back the curtain on your business credit
Ready to see your credit data and build stronger business credit? Check your personal and business credit for free.Check my scores