june2022 - 24

FEATURE
2022 Independent Contractor Update
BY THE TIME California's AB5 worker classification ruling went into effect on
January 1, 2020, employers and independent contractors were already fighting
to have their business models considered exempt. In brief, California's AB5 goes
beyond the Internal Revenue Service's (IRS) independent contractor classification
test and assumes workers are employees unless the worker passes a 3-point
" ABC " test.
An independent contractor must meet the
following criteria:
* (A) The person is free from the control and direction
of the hiring entity in connection with the
performance of the work, both under the contract
for the performance of the work and in fact.
* (B) The person performs work outside the usual
course of the hiring entity's business.
* (C) The person is customarily engaged in an
independently established trade, occupation, or
business of the same nature as that involved in
the work performed.
Industries, such as trucking, ride-share
services (Uber, Lyft), and food-delivery services,
immediately balked at the new, stricter guidelines.
Some courts agreed and granted a temporary
exemption to several kinds of workers.
And then, the Covid-19 pandemic hit.
The number of gig economy workers grew
33% in 2020 (https://tinyurl.com/426np5vb), partly
due to the shelter-in-place orders increasing the
demand for food and goods deliveries. Further
blurring the lines, some independent workers were
offered general and unemployment benefits during
the pandemic-which are typically reserved
for employees.
Although the idea of AB5 was to protect
workers from employers wanting to avoid paying
payroll taxes and dodge other labor regulations,
many freelancers also wanted to maintain their
independent contractor status and remain free
from employer/employee restrictions.
So, what has happened in California since
AB5 went into effect? Has anything changed in
other states?
CALIFORNIA AMENDMENTS
California's AB 2257 was enacted in September
2020 and:
* AB 2257 included a modified and expanded list
of professions exempt from the " ABC " test. These
changes primarily impacted freelance writers,
vocalists, musicians, film crews and visual artists,
licensed professionals, truck drivers, real estate and
home appraisers, and some salespersons.
* AB 2257 also made clearer stipulations to the
independent contractor classification, such as:
* Contractors must have a separate business address
* Contractors must carry their own business
insurance
* Contractors can hire and fire their own help
* Contractors can receive feedback on work done but
are not required to follow it
Proposition 22 was passed by California voters
in 2020 to amend AB 2257, but it was declared
" unconstitutional " in 2021 by a California judge.
That ruling is being appealed, but the proposition
remains in effect, awaiting the outcome.
* Prop. 22 deemed app-based drivers (Uber, Lyft, etc.)
to be independent contractors and not employees.
However, some labor and wage policies specific
to app-based drivers still apply, such as limiting
hours and requiring some health care subsidies.
With these actions, there are about 75 professions
now exempt from the independent contracting
test set out in AB5. To help clients maintain
their independent contractor status, make sure
they don't mix their business expenses or purchases
with personal ones. It also helps prove
their independent status if they register their
companies as legal entities with the state, such
as a corporation or limited liability company (LLC).
Likewise, if your clients use independent
contractors in their companies, make sure they
scrutinize the working relationship, get contracts
in writing (with a project end dates), and ask for
references from other clients to show the worker's
income is not dependent on one company.
AB5 ACROSS THE U.S.
In January 2021, the U.S. Department of Labor
(DOL) issued a ruling to clarify whether a worker
may be classified as an independent contractor
versus an employee under the Fair Labor
Standards Act (FLSA). The DOL determined that
24 JUNE 2022 ■ www.CPAPracticeAdvisor.com
By Nellie Akalp
two core factors should be applied to a worker.
If both factors point to a definite classification,
the business can classify the worker by that
determination:
* The nature and degree of control over the work
* The individual's opportunity for profit or loss
If, however, the first two core factors point
to separate conclusions, the employers must
then look at three other factors to decide:
* The amount of skill required for the work
* The degree of permanence of the working
relationship between the individual and the
potential employer
* Whether the work is part of an integrated unit
of production
In addition to federal guidelines, each state
has its own guidelines for employers, which
should be reviewed for every state where your
clients have workers. According to the Economic
Policy Institute (EPI), more than 20 states have
adopted the ABC test for determining whether an
individual is an employee or a contractor.
By shifting the classification responsibility to
the employer, these 20 states hope self-regulation
will reduce the number of misclassification
violations occurring year after year. Plus, as the
construction industry can be particularly confusing,
some states use the ABC test specifically
to determine independent contractor status for
construction workers.
AN ONGOING PREDICAMENT
Employers consistently misclassify workers,
which could land them in big trouble with state
and federal labor departments, resulting in heavy
fines and possibly having to compensate workers
for back pay and benefits. You can help by
recommending that clients keep separate business
and personal finances, set up a separate business
address and bank account, create a legal entity for
their companies, and acquire the correct licenses
and permits to run a business. ■
Nellie Akalp is a passionate entrepreneur, business
expert, and mother of four. She is the CEO
of CorpNet.com, a resource and service provider
for business incorporation, LLC filings, and
corporate compliance services in all 50 states.
Akalp and her team recently launched a partner
program for accountants, lawyers, and business professionals
to help them streamline the business incorporation
and compliance process for their clients.
https://www.tinyurl.com/426np5vb http://www.CorpNet.com http://www.CPAPracticeAdvisor.com
june2022

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