California Growers Face New Contractor Rules

Citrus growers in California need to reevaluate their working relationships with independent contractors to ensure they follow new state regulations that redefine who is an independent contractor. Signed by California Gov. Newsom last fall, the new rules state that any worker is an employee unless the hiring entity can demonstrate that the worker is an independent contractor. The law becomes effective Jan. 1, 2020.

The law requires employers to treat workers previously classified as contractors as employees, with minimum wage, overtime, sick leave, unemployment and other benefits. Opponents say the law could increase labor costs by up to 30 percent.

The new law presumes that a worker is an employee unless the employer can demonstrate by way of a three-factor test that the worker is an independent contractor. The test determines if provisions of the Labor Code, the Unemployment Insurance Code, tax withholdings, and the wage orders of the Industrial Welfare Commission apply to that worker.

A person providing labor or services for remuneration is considered an employee rather than an independent contractor, unless the hiring entity demonstrates that the person is:

A) free from the control and direction of the hiring entity in connection with the performance of the work;
B) the person performs work that is outside the usual course of the hiring entity’s business; and,
C) the person is customarily engaged in an independently established trade, occupation or business.

Each of these three parts in the test must be met for an individual to be considered an independent contractor. However, the law recognizes the difference between an individual providing a service (and being issued a 1099) and a business providing a service. The business is not subject to the test if it meets criteria previously established that defines a business.

Specifically, the criteria allow a business entity (whether a sole proprietorship, partnership, limited liability company, limited liability partnership or corporation) to contract to provide services to another business. To be a business instead of an employee, the company must pass a test which was adopted by the court in Borello v. Department of Industrial Relations (1989).

This test is complex, but essentially establishes that the service provider is an independent business if it meets the following:

• It is free from the control and direction of the contracting business entity in the performance of the work.
• The contractor provides services directly to the contracting business rather than to customers of the contracting business.
• The contract with the business service provider is in writing.
• The business service provider has obtained any required business license or business tax registration.
• The service provider maintains a business location that is separate from the business or work location of the contractor.
• The business provides its own tools, vehicles and equipment to perform the services, negotiates its own rates and sets its own hours and location of work.
• The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.
• The provider actually works with other businesses to provide the same or similar services or advertises and is available to the public to provide the same or similar services.