Earlier this year, the California Supreme Court issued a ruling that redefines the rules for determining independent contractors. The ruling rejected the old multi-factor standard and establishes an “ABC test” for determining independent contractor status, as follows:
A. The worker is free (contractually and in fact) from the control and direction of the hirer in connection with the work; AND
B. The worker performs work that is not the hiring entity’s usual business; AND
C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
The decision emphasizes that workers are presumed to be employees until they satisfy all three of these tests. Only then can they be considered an independent contractor. The method of reporting income (Form W-2 vs. 1099) is immaterial to this determination.
For retirement plan sponsors, employee status is important for determining who is required to be covered by the plan. By definition, independent contractors are not employees and cannot be covered by the plan. Excluded independent contractors who are later determined to be employees would be due retroactive benefits under the plan and would be precluded from sponsoring their own retirement plans for the period they were determined to be employees.
Employers would be advised to review the ruling to determine its effect on their own use of independent contractors. The ruling can be found at the following link:
For questions or more information, please contact Richard Green at firstname.lastname@example.org or (844) 252-7337.