Employees vs Independent Contractors

In early September, California passed a landmark bill regarding the gig economy. The bill, AB 5, was approved by California’s State Senate, Assembly, and signed by Governor Gavin Newson. AB 5 addresses the “gig economy,” which includes companies like Uber, Lyft, DoorDash, Postmates, and other similar companies. These gig economy companies have always classified their workers as independent contractors, but when AB 5 takes effect January 1, 2020, they will no longer be allowed to do so in California.

According to CNET, “all companies using independent contractors in [California] will be put to a three-part test that looks at how much control the company has over its workers.” This reclassification could completely change the way these companies manage their workers and could have huge effects on the companies overall. Uber’s Chief Legal Officer, Tony West, has stated that he believes Uber will pass the new test and therefore Uber will not immediately reclassify workers. In addition, The New York Times stated that Uber, Lyft, and DoorDash have pledged to spend $90 million “to support a ballot initiative that would essentially exempt them from legislation.”

Although we live and work in North Carolina and South Carolina, this California bill highlights the importance of employers correctly classifying workers as employees or independent contractors. Attorneys Clay Campbell and Matthew Marcellino get questions from their business clients often: What is the difference between an employee and an independent contractor? How do I know if I should classify my workers as employees or independent contractors?

To answer any question regarding correct classification, employers need to keep in mind how they define the employment relationship with their workers. To make the correct classification, there are multiple factors and criteria that must be evaluated about each worker.  The U.S. Department of Labor and North Carolina and South Carolina state law consider the following factors when determining whether an individual is an employee or independent contractor:

  1. The extent to which the services rendered are an integral part of the principal’s business.
  2. The permanency of the relationship.
  3. The amount of the alleged contractor’s investment in facilities and equipment.
  4. The nature and degree of control by the principal.
  5. The alleged contractor’s opportunities for profit and loss.
  6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
  7. The degree of independent business organization and operation.

It is important to make the correct determination for multiple reasons, but one reason that companies tend to be concerned about is liability, and with good reason. When a company has employees rather than independent contractors, the company has more liability exposure, must pay taxes on employees, and must have employees covered under its worker’s compensation policy.

There is not one simple factor that can correctly classify workers, but experienced business attorneys can help. At Marcellino & Tyson, our business team learns about your business and needs to help guide you in the right direction for any and all legal issues, including how to classify your workers in the best way for your company. Give us a call today at 704-919-1519 to set up a consultation to protect what’s yours.