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’re not familiar with the concept, it would be prudent to get in the know, because New Jersey and Rhode Island employ the same standard and California is almost certainly not going to be the last state to institute this rule.
What is the deal with this ABC Test?
Due to 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 rebut by satisfying all three conditions of the test:
First, a contractor cannot be told when, where, or how to perform their work. In short, your clients have to act less like clients like to act. Working remotely can help, but it is not completely necessary and does not entirely satisfy this condition.
Next, a contractor’s work must be outside the normal course of business of the employer. For example, a design firm cannot hire a freelance graphic designer. An ad agency with an in-house video team cannot hire a freelance video editor.
Finally, a contractor must own and operate an independent business. At an absolute minimum, this means freelancers should have an EIN.
The consequences for disregarding these guidelines can be severe, business shuttering penalties. In addition to employee restitution, employers face back taxes and late penalties from unpaid payroll taxes if one of their freelancers has been improperly classified.
Although the intent of this decision is supposed to be worker protection, it can make things difficult for freelancers, too, because it may make prospective clients hesitant to hire on a contract basis due to the potential risk of having a freelancer incorrectly classified.
What can a freelancer 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 tell you to incorporate. So, rather than risk missing out on clients, create a legal business entity. Besides, there are other benefits to doing this, including personal liability protection and potential tax savings.
2. Always Have a Contract
To be honest, you should always have a contract anyway. There is 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 assuage the fears of a client who may only have a tangential understanding of the rules. Additionally, employers will face penalties if they are found to be “coaching” you on how to satisfy the ABC test, so you’ll need to be responsible for knowing how to sing the right tune when the time comes, without anyone playing the melody for you.
Note: You will probably encounter clients who are, for whatever reason, willing to risk ignoring the ABC test. As much as it is probably unwise 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 nearly 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.
Dave DiVerniero is a freelancing expert and advocate. He was a freelance editor and producer for nearly a decade, serving some of the biggest clients (Facebook, Oakley, Audi) and TV Shows (e.g. Hell’s Kitchen, Biggest Loser, Tanked) in the world. Now, as The Freelancer Advocate, he teaches creative professionals how to build freelance careers and supports freelancers by speaking out against inequitable treatment.