This is a guest blog post from our friend David DiVerniero who is a freelancing expert and advocate.
Disclaimer: I am not an attorney. Nothing in the following article should be considered legal advice.
While you may consider yourself wholly and completely a freelancer, your legal standing might not be so open and shut.
If you’re a freelancer in California, you may have heard about the ‘ABC test’, which makes it more difficult to be classified as a freelancer.
If you haven’t heard of the ABC test it’s a good idea to get to know it because New Jersey and Rhode Island use the same standard and it’s very possible more states will also be using it soon.
What is the deal with this ABC Test?
After a case in the CA Supreme Court in May of 2018, the guidelines for classifying a worker as an independent contractor became much stricter.
Essentially, everyone is considered an employee unless the employer can prove otherwise using the three conditions of the test:
First, a contractor can’t be told when, where, or how to perform their work. In short, your clients can’t tell you 100% what to do. Working remotely helps, but it’s not completely necessary and doesn’t automatically pass this test.
Second, a contractor’s work must be outside the normal course of business of the employer. For example, a design firm can’t hire a freelance graphic designer. An ad agency with an in-house video team can’t hire a freelance video editor.
Why? Because these positions are within the business’s scope of work. Who could a design firm hire as a contractor? A bookkeeper, which doesn’t have anything to do with the service the firm offers.
Finally, a contractor must own and operate an independent business. At an absolute minimum, this means freelancers should have an EIN.
What happens if a business ignores these guidelines? The consequences can be severe, business shattering penalties. If one of their freelancers has been improperly classified, businesses face back taxes and late penalties from unpaid payroll taxes.
Although the intent of this law is supposed to be worker protection, it can make things difficult for freelancers. Some prospective clients might be hesitant to hire a contractor because of the potential risk of having a freelancer incorrectly classified.
What can freelancers do to make clients feel better about hiring them?
Do it now. Certain clients may not consider you a freelancer if you don’t have an LLC or S corporation. But, due to the guidelines of the ABC test, they can’t directly tell you to incorporate.
Rather than risking missing out on clients, create a legal business entity. Besides racking in the clients, there are other benefits to incorporation, like personal liability protection and potential tax savings.
2. Always Have a Contract
To be honest, you should always have a contract anyway. There’s never a good reason to not have one. And it shouldn’t be a surprise to learn that, to be legally considered a contractor, you should have a contract.
3. Understand the Guidelines
No one needs you to whip out a pocket law degree, but you should understand the ABC test well enough to reassure clients who only have a tangential understanding of the rules.
Also, employers will face penalties if they are found to be “coaching” you on how to satisfy the ABC test. This means you’ll be responsible for knowing how to sing the right tune when the time comes, without anyone playing the melody for you.
Note: You’ll probably encounter clients who are, for whatever reason, willing to risk ignoring the ABC test. As unwise as it is to try to skirt the rules, employers are the ones who take on the risk, so the onus is on them to decide if it’s worth it.
While the ABC test has yet to take over everywhere, most states have rules that define legal freelancer status, and many are just as strict.
It’s worth spending some time finding out how your state decides the legal standing of contractors. Doing so may help you win clients, and it can even help you protect yourself from employer mistreatment.