California’s new independent contractor law suggests best classification practices

Supplemental materials for LEAP 2025 session Can we set alternative schedules to avoid California’s overtime requirement?

Assigning some of your work to independent contractors has lots of benefits. You don’t have to carry them on your payroll, withhold taxes when you pay them or provide benefits. But working with independent contractors is not without challenges.

Chief among them is making sure you have properly classified them as independent contractors, a task complicated by the fact that there are several standards for determining independent contractor status.

• First, you worry about the U.S. Department of Labor and whether it will accept your classification of workers as independent contractors. If you’re wrong, you may face overtime and minimum-wage lawsuits for back pay. To get the classification right for the DOL, you must meet its six-factor economic reality test.
• Then there’s the IRS’s independent contractor test. Get this one wrong and you may owe taxes and penalties.
• And if that’s not enough, states have their own tests. These are the most restrictive of all. Referred to as the ABC test, it assumes a worker is an employee unless it is clear the worker controls their own work, the work being performed is outside the work that’s integral to the company’s business and the worker is running an independent business performing the kind of work the company is having them perform.

However, there’s hope on the horizon for organizations that need to make sure they properly classify the contractors with whom they work. A new California law takes effect next month that could provide a classification best-practices model that might be applicable anywhere.

California arguably has the most restrictive independent contractor rules of all. Following them means you likely will pass any of the less stringent tests with flying colors.

The California Freelance Worker Protection Act clarifies who’s an independent contractor and how to treat them. The FWPA, which goes into effect Jan. 1, 2025, creates new requirements for organizations that use freelance workers or independent contractors to provide professional services. The law requires written contracts, careful record-keeping and timely payments.

If you follow these best practices—codified in the FWPA—you should stay on the right side of classification law no matter where you operate:

Get it in writing. No independent contractor agreement should be oral. The FWPA says all freelance and contractor agreements must be in writing. That is something every organization that uses independent contractors should do—every time.

Be specific. Contract documents should include specifics like listing the services the independent contractor will perform and what they will be paid for those services.

Invoicing. Be sure to set requirements for how and when the independent contractor will invoice for services. Include specifics about when they will receive payment and how they will be paid. For example, will you pay invoices within 30 days? Can the independent contractor arrange for direct deposit?

Record-keeping. Organizations using freelancers must keep a copy of the contract for at least four years. Longer is better.

Bottom line: If you use independent contractors, memorialize those arrangements with contracts and retain them for as long as practical.

Interested in joining HR Employment Law Advisor? For a limited time, LEAP 2025 attendees can get an annual membership at 30% off at https://www.hremploymentlawadvisor.com/leap30. 

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