Endangered Species.

California Takes Aggressive Stance on Independent Contractors 

Independent contractors may be California's next endangered species if the Legislature passes SB 1128 (Kuehl) in 2002. The bill would require employers to consider the principles established in the California Supreme Court case S.G. Borello & Sons vs. Department of Industrial Relations, 48 Cal.3d 341 (1989) when determining independent contractor status.

These new standards would pile on top of the already high standards that California employers must adhere to when determining if workers should be classified as independent contractors or employees. Currently, businesses must wade through a federal test as well as California's often confusing test.

Additionally, many businesses and their tax advisers are experiencing the frustration of implementing the new 20-day EDD filing requirement for independent contractors to whom they anticipate paying $600 or more during the calendar year.

Current Law

Currently, California businesses rely on the common law rules in the Unemployment Insurance Code to determine independent contractor relationships. Under these tests, a relationship exists unless the principal exercises "control" or has the "right of control" over the individual's job performance and how the individual completes the job. Factors considered under that "right of control" include, whether the principal has the power to discharge at will and without cause, and whether the work is usually done under the principal's direction or by the contractor without supervision.

Looming Changes

SB 1128 would impose the factors considered in the Borello decision, which held that a grower was the actual employer of harvesters for workers' compensation coverage purposes. This was despite a written contract delineating an independent contractor relationship and evidence that the harvesters could profit from their farming skills and share in any loss due to negligent work. The new factors that would broaden the common law test include:

* The contractor's opportunity for profit or loss depending upon managerial skills;

* The contractor's investment in equipment or materials required for a specific task;

* The contractor's employment of helpers;

* Whether the services rendered by the contractor require specific skills;

* The degree of permanence of the working relationship; and

* Whether the service rendered is an integral part of the principal's business.

The court also considered which of the parties in a contractual relationship is in a better position to bear the risk of paying for social programs (e.g., unemployment and disability insurance and workers' comp). According to CPA tax practitioners familiar with independent contractor issues, there are almost no instances in which an independent contractor is in a better position to assume the risk of unemployment.

SB 1128 also would find and declare that "unemployment insurance, workers' compensation insurance and state disability insurance, are part of a comprehensive and integrated social insurance program designed to alleviate the burden and reduce the suffering from a covered employee's loss of wages as a result of involuntary unemployment, industrially caused disability, or disability of a non-occupational nature."

Impact on Business and CPAs

This legislation will make it more confusing for CPAs and businesses to comply with the law. Under SB 1128, workers could be classified as independent contractors based on common law principles and pursuant to a written contract establishing the relationship. However, if the individual works alone, has little investment in equipment or materials, or provides a service that is integral to the business, then under SB 1128 the worker would have to be considered an employee rather than an independent contractor. The burden of proving the existence of an independent contractor vs. employee relationship could be overwhelming for businesses and penalties for misclassifications are very expensive.

SB 1128 opponents also say that rather than providing more access to unemployment and workers' comp benefits, the bill actually could discourage businesses from hiring independent contractors for fear of being considered employers of individuals over whom they have limited control. If small businesses are unable to contract with professionals to guide their business' growth and efficiency, they will be unable to compete.

Others argue that SB 1128 will push more people into the underground economy, since to remain competitive, some businesses may prefer to pay contractors under the table. Another concern is a significant hit to the consulting sector that could adversely impact California's already reeling economy.

What's Next

SB 1128 has passed the Senate and awaits hearing in the Assembly Labor and Employment Committee (probably in January). Its opposition by the California Chamber of Commerce; California Newspaper Publishers Association, California Manufacturing and Technology Association and CalCPA has been able to slow progress on the bill. CPAs are encouraged to discuss this issue with their state legislators especially Assembly members who will likely vote on the measure next year.

For more information, e-mail [e-mail] or for a copy of the legislation go to http://calcpa.irisl.com and after entry click on Alerts.

Bruce Allen is CalCPA's director of government relations.