…Independent contractors, freelancers a sore point for state officials
INDEPENDENT CONTRACTORS and freelancers have long been a sore point for federal and state officials who contend that many of these workers are doing work that employees do. When employers classify workers as independent contractors, they avoid taxes, including the 6.2 per cent of salary and wages companies must pay for Social Security and the 1.45 per cent they must pay for Medicare. Employers must also pay for workers’ compensation and unemployment and disability insurance.
For many small business owners, especially those who do a variety of projects requiring different types of expertise, contractors provide more flexibility. Webconsuls, a digital marketing agency with offices in California and Tennessee, bases its hiring decision on the work it has and whether projects are long or short term.
“We may need a developer who specialises in a specific language to help us build one website,” managing partner John McGhee says. “If we don’t anticipate having to use that language again in the near future, we’ll hire a contractor to build the website.”
The layoffs companies were forced to make during and after the Great Recession encouraged many small business owners to choose independent contractors over employees. Contractors cost less – they don’t get health insurance, 401(k) contributions, and other benefits – and owners don’t have to let people go when business slows.
The new law allows workers to be classified as independent contractors only if companies don’t have the right to control their work and how it is done. A number of factors go into making that determination, including how closely the worker is supervised, for example, who sets their hours. The work being done must not be part of the company’s regular business, and the worker’s occupation must be distinct from the company’s. In other words, a graphic designer cannot be an independent contractor for a graphic design firm.
There are exemptions for professionals like doctors, lawyers, architects, and insurance brokers, but they must have the freedom to set their own hours, negotiate their own fees, and exercise their own judgment as they do their jobs. Workers like graphic artists, freelance writers, and travel agents can also be exempt if they have similar autonomy. And people who work in barber shops, hair and nail salons, and spas can have exemptions, but they have to set their own rates and hours, choose their own clients, and be paid directly by the clients.
Marisa Vallbona has transitioned a contractor who has worked for her in California into an employee and is being more selective about the work she takes on in the state.
Vallbona, who recently moved the headquarters of her public relations firm, CIM, to Houston from California, is now using only Texas-based contractors.
“I don’t work with freelancers in California anymore because of the gig economy problems,” she says.
Other companies inside and out of California are likely to follow suit. The increase in remote working over the past two decades has made it easier for companies to find workers anywhere.
Companies that don’t comply with the law face the possibility of penalties running into the tens or hundreds of thousands of dollars, says Nannina Angioni, an employment law attorney with Kaedian LLP in Los Angeles. She’s warning clients that the law expands the ability of local officials, and not just state tax officials, to enforce the law starting on July 1.
Moreover, Angioni says, the law can lead to lawsuits brought by workers.
Some owners may believe it is OK to use independent contractors or freelancers because some workers like being part of the gig economy, says Michael Boro, a consultant with PwC whose expertise is in workplace issues.
“These people don’t want to be employees” is the position owners may take, Boro says. But, he warns, they need to follow the law, not workers’ wishes.