What is Proposition 22?
Watch our video below for a full explanation:
Proposition 22 appeared on the 2020 ballot as the rideshare and app-based driver responded to AB5. California Proposition 22 was passed by voters in California and defined app-based rideshare drivers, such as Lyft, Uber, and Grubhub drivers, as 1099 independent contractors instead of W-2 employees.
The important aspect of this proposition was that under AB-5 and the new ABCs of contractor classification, any worker who was exempt from the 3-factor test then had to pass the old 13 factor Borello test. However, after Prop 22, all rideshare drivers are made totally exempt from any classification criteria and are automatically classified as 1099 contractors.
Prop 22 is currently being challenged having been overturned as unconstitutional by the California Supreme Court because it tied the hands of future legislatures. Future CA Supreme Court litigations will determine whether Proposition 22 will return into force. The question remains, what is the classification for rideshare drivers in the meantime?
The reason for the Supreme Court decision on Proposition 22 is based on a constitutional argument surrounding the proposition. The State of California argues that Prop 22, which was passed by voters, took away the power for the State of California to regulate workers, the safety of the workers, and whether the workers really should be classified as employees. Learn more about why Prop 22 was overturned by the the California Supreme court here.
What Does Prop 22 Mean for My Business?
With Prop 22 potentially inspiring changes in worker classification on a federal level, many government agencies are looking at worker classification closely. This means that no matter what state you’re in, a government agency can analyze your workers and potentially—if you have misclassified workers—assess additional payroll taxes, penalties, fines, and interest. If you have a company that hires independent contractors, analyze them very carefully to make sure they are classified correctly.
If your company is audited by the State of California, typically by the Employment Development Department (EDD) in this case, they could apply two different factors.
The 13 original factors were called the Borello test. And any worker that was employed before January 1st, 2020 is classified by applying the Borello 13 factor test. Any worker hired after January 1st is classified by applying the ABC test as outlined in AB-5.
What is the Borello Test?
The 13 Factor Borello Test classified workers as employees or independent contractors before AB-5 passed. It provides less clarity than the ABC test. Currently, if the worker is an exempt AB-5 business, the Borello test is still used to determine classification. The test asks the following questions:
- Do you instruct or supervise the person while he or she is working?
- Can the worker quit or be discharged (fired) at any time?
- Is the work being performed part of your regular business?
- Does the worker have a separately established business?
- Is the worker free to make business decisions that affect his or her ability to profit from the work?
- Does the individual have a substantial investment in their job which would subject him or her to the financial risk of loss?
- Do you have employees who do the same type of work?
- Do you furnish the tools, equipment, or supplies used to perform the work?
- Is the work considered unskilled or semi-skilled labor?
- Do you provide training for the worker?
- Is the worker paid a fixed salary, an hourly wage, or based on a piece-rate basis?
- Did the worker previously perform the same or similar services for you as an employee?
- Does the worker believe that he or she is an employee?
What is AB-5?
AB-5 is the abbreviation for Assembly Bill five, which was written by Lorena Gonzalez and went into January 1st, 2020. The goal of the bill is to protect workers from predatory employers who try to skimp on workers’ compensation, benefits, and other protections employees receive by classifying their workers as contractors.
In practice, the law prevents many gig workers from remaining in their chosen classification because they lack all of the elements necessary to qualify as an independent contractor.
This bill compressed the Borello Test into three criteria, called the ABC test, that all independent contractors must meet in order to be classified as independent contractors.
What is the ABC Test?
The ABC test is a three-part test, A, B, and C that differentiates employees from independent contractors. A worker is automatically considered an employee unless they meet all three of the following criteria.
- 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;
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
The first section, part A, explains that the hiring company cannot have control over the worker. Control comes in many forms. It could be requiring the worker to report daily, weekly, on the status of the work. It can require them to wear a name badge, a uniform, or anything that shows control over how the worker performs their work.
Part B examines the services performed by the contractor or worker. It also looks at what the hiring company does. Is the work the new worker will do the same as the company’s core business?
For example, a residential plumbing company hires a residential plumber to do plumbing services. It may be very difficult to show that an independent contractor worker, who performs plumbing services, which is identical to the company, is really an independent business. If the worker performs the same tasks as a W-2 employee, they are likely to need reclassification.
Part C of the ABC classification criteria examines whether the worker has an independent trade or business. Does the worker advertise? Do they invest in their business equipment? In the plumbing example, the contracted plumber will have their own tools and equipment, not provided by the hiring company as well as a website, other clients, a business license, a tax ID, and professional licenses as needed.
At its core, the law is looking to determine whether a worker has a real independent business, and not simply that they’re only performing work for one company and being denied protections and benefits.
What is a got1099 Report for your Independent Contractor?
A got1099 report helps your business be sure about the classification of your workers. The report verifies that your independent contractors have a valid license, business entity and that their licenses are not expired or suspended/ revoked. In cases where the worker does not meet the criteria for being classified as a 1099, there are options an employer can take.
- Hire them as a W-2
- Share the report with them so they can remedy missing areas that would allow them to be classified as a 1099
Contact our team today to learn more about 1099 worker classification.
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got1099 is a business reporting company providing business analysis reports to companies re: their 1099 independent contractors We do not provide legal advice. Consult with your attorney relating to any legal issues.