Do you know your ABC's? What you need to know about California's new law for independent contractors
In April of this year, the California Supreme Court abandoned its longstanding common law test used to determine independent contractor (IC) status and instead, adopted the strict ABC test. Several states have also adopted the ABC test, but some states are more relaxed in their application, requiring that only the “A” or the “B” sections be satisfied. In California however, all sections must be met in order to justify IC status.
Although this newly-adopted test is expected to hit hardest on the larger “gig” economies, all industries that hire contractors stand to be impacted. Since the US language services industry relies heavily on contractors, they could very quickly find themselves restructuring their 1099ers.
Potential impact on language services
In early August, several language industry professionals assembled with the Association of Language Companies (ALC) to discuss their concerns.
Language services are needed in virtually every sector, including healthcare, government agencies, education, finance, technology and more. According to the Nimdzi 100, the language services market will grow at 7.4 percent CAGR for the next 5 years, but enforcing this new test, could potentially threaten the financial wellbeing of many small to moderately-sized LSPs, which could in turn, negatively affect their clients.
According to the US Bureau of Labor Statistics, employment for interpreters and translators is projected to grow by 18 percent by 2026 due to an increasingly globalized economy and an increasingly diverse population – and this could mean one heck of a lot of restructuring.
The facts, ma’am, just the facts
1. A new test, not a new law
There is no new law per se, and no new regulations. What there is, is a new test that has been adopted in its strictest sense. The ABC test presumes that all workers are employees and places the burden on employers to prove otherwise.
2. California wage order claims only
The new ABC test will only apply to claims brought forth under the California wage order, including disputes over minimum wage, overtime, as well as meal and rest breaks. The test does not apply to disputes over reimbursement expenses or employee benefits.
3. California isn’t playing games
Although there are several states that have adopted the ABC test but have either limited its use to very specific situations or have only enforced sections “A” or “B”, California isn’t one of these states. Much like New Jersey and Massachusetts, California is applying all three sections. Should an employer fail to satisfy even one of the three, the IC would be classified as an employee.
4. Know your ABCs and pass the test
The IC is “free from control and direction” with regard to the performance of the work contracted
The IC does not perform the core function of the business
The IC is actively promoting their own business outside of the contracted work they receive from you
If you are confused, don’t worry, you’re not the only one. We’ll try to make sense of it for you.
Section “A” insinuates that employers have no say in what or how the IC performs her work, but this isn’t the case. To ensure you pass the “A” section of the test, set up a detailed contract that both you and your IC sign and by which you both abide. This should include the scope of your expectations and should replace the need to micromanage.
For LSPs, section “B” is a little trickier to navigate if the core function of your business is interpreting or translation. You may need to reconsider your core function – to which other areas does your company devote a great deal of time and/or which areas require the heaviest investment?
The burden of proof for section “C” lies squarely on the IC’s shoulders who should at the very least, show “intent” to pursue additional clients – an established website for instance, or a marketing campaign underway.
Proponents of the ABC test
Those in favor of this new legally-mandated test stress that millions of employees are being reclassified with an IC status and that millions of full-time jobs are being replaced with contracts.
These proponents claim that when workers are misclassified, some companies gain an unfair competitive advantage over others that have properly classified their workers. This misclassification leads to a significant loss in revenue at the federal and state levels and deprives millions of workers of the labor law protections to which they are entitled.
But this controversy is not new to the language services industry. LSPs have oftentimes had to face scrutiny with regard to their independent contractor business model and have had to defend the accusation that perhaps they are underpaying their interpreters and misclassifying their workers. Nonetheless, since the vast majority of interpreters do work as ICs, how will the industry as a whole, adhere to this new test without compromising their business model?
Those who are prepared to gamble say that it comes down to relationships. If there is a clear understanding regarding the employment arrangement, total transparency, an environment to openly discuss concerns and clarify misunderstandings, and if independent contractors feel that their time and expertise are being fully respected, companies may not need to restructure their entire business model. Some industry leaders believe that the onus will largely be on the workers and that the only way this new test will truly be enforced is “if” and when workers bring forth an official complaint – but that’s a gamble, and the vast majority of professionals within the language services industry strive to remain compliant.
Reclassification ultimately leads to federal social security, payroll taxes, unemployment insurance taxes, state employment taxes, worker’s compensation insurance, as well as compulsory compliance with state and federal statutes and regulations that govern wages, hours, and working conditions of employees. Larger LSPs might be able to absorb this restructuring but not without it initially packing a serious financial punch. But what about smaller LSPs? Will they survive? What are the risks?
The incompliance gamble: For those who decide to carry on with business as usual, it is important to know the risks. Should one of your contractors file an official complaint, you could be facing hefty fines and penalties, and may subject your company to audits. This gamble also risks possible back-tax payments and a loss of reputation and trust.
Is ABC really as easy as 1, 2, 3?
The Jackson 5 seemed to think so, but times are changing. The question really comes down to whether or not your LSP leans more toward compliance or would rather roll the dice.