The US Department of Labor (DOL) recently (May 2021) withdrew Trump administration proposed rules that would have made it easier for businesses to employ independent contractors.
With the removal of these rules, we are now moving toward a new type of test in determining whether workers are independent contractors or employees. Most of the press has been focusing on gig workers (Uber, Lyft, etc.) but the independent contractor worker strategy goes way beyond just gig workers.
In the past, the rules focused on the permanence of the relationship, degree of investment by the worker, amount of independence the worker had in decision making and the degree of independent business organization. The Trump Admin talked more about control and the worker’s opportunity for profit or loss.
Both of those are pretty much gone. Now we’re looking at brand new tests, referred to as the ABC tests. California and Massachusetts have adopted them already. We’re going to see a lot more about this in the near future.
Look for a Wednesday Coaching class about this soon! (Business topics are discussed on the third Wednesday of the month at 5 pm Pacific). The Home Study Courses we debut during the Wednesday Coaching classes for real estate investors (1st Wednesday), business owners (3rd Wednesday) and for the next two months, finishing out the Sustainable Digital Empires training course (2nd and 4th Wednesday).
The Rules for the ABC Tests
In legalese, these are the 3 rules for the ABC tests. Workers must pass all of them in order to be considered independent contractors, and not employees.
- That the worker 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, and
- That the worker performs work that is outside the usual course of the hiring entity’s business, and
- That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
What NOT to Do With ABC Test
Independent contractor or employee? Business rely on independent contractor workers. It allows them to expand and change their business more quickly. That’s important in today’s rapidly evolving business climate.
They aren’t responsible for payroll taxes or benefits.
And, at the same time, being an independent contractor means that workers have more flexibility with their hours and way that they work. They also will pay less in taxes because they have more deductions.
The first part of the ABC test is that the company can’t control the worker.
My Receptionist is an Independent Contractor. Is That Okay?
A consultation client went through their staffing with me. Everyone was an independent contractor. Most had the right to set their own hours and determine how much work they did. The one big exception was the receptionist. She had a set hourly schedule and sat at a big reception desk in the foyer.
She had no control over her hours or the work that she did.
She is an employee. She’s not an independent contractor.
The second part of the ABC test is that the worker performs work outside the regular function of the business.
How Uber/Lyft Drivers Could Become Employees
The business of Uber and Lyft is providing rides to passengers. At least that’s what the federal and state governments are claiming. Uber has said their business is an app that connects drivers and those who need a driver.
The importance of that difference has to do with the ABC test. If the business of Uber is providing rides, then those that provide the rides would be working in the regular function of the business. That means they are employees under this second test.
If Uber and Lyft instead are computer app companies, then the drivers aren’t part of their business. At least not if you take a broad definition.
The third part of the ABC test has to do with the worker and his or her own business. Do they control it? Do they have a business structure and other clients? If so, there is a good chance they’re an independent contractors.
Business Structure Isn’t Enough
“One of my chiropractors wants to be an independent contractor, a 1099 worker,” my consultation client explained. “He’s a chiropractor who sees patients in my office. We find the patients. We collect the money. He just works here because he doesn’t want to set up another office.”
He went on to suggest having his “independent” worker set up an S Corporation.
“That should be enough, right? After all an employee wouldn’t have a corporation,” he went on, reasoning.
Unfortunately, he was wrong. The chiropractor, working in this manner, didn’t pass either the 2nd or 3rd test. He was critical to the nature of the employing chiropractor’s business and he had no income outside of the chiropractor’s office.
California’s ABC Test
California was the first state to aggressively push the ABC test. That’s the subject of 1099 Worker or Employee? If you have independent workers, review the details of what California has done to get an idea of what may be coming for you and your business.
It’s not just the IRS that is closely monitoring the ABC test option for determining independent worker vs employee. State government departments are watching it for the assessment of unemployment insurance and whether wage and hour laws would apply.
Once a state adopts the ABC test, your business would be required to rapidly change your business operation. Otherwise, you could be facing large penalties and payments to your workers.
Keep up-to-date on tax changes by staying registered at Tax Updates.