As the number of so-called “gig” employees continues to grow, outpacing growth in the rest of the workforce by as much as three times, according to some estimates, a number of states are taking up legislative efforts to define who meets the definition of a gig employee – more formally known as an independent contractor – and what benefits they should be able to obtain.

Distinguishing Gig Workers from Employees

Gig workers are distinct from employees in that they provide services for hire, but typically under short-term contracts that do not make them employees of the company.

Proposed legislation in California would make workers in “digital marketplaces” like Uber drivers and other freelancers who take assignments through a digital network, eligible for benefits. The bill could also further define the definition of a contract worker, an issue that is being closely watched by labor interests.

Meanwhile, a case pending before the California Supreme Court also has the potential to remake the definition of what constitutes an employee. Experts says the case could have broad repercussions because of the number of such digital marketplace companies located in California.

Workers Often Misclassified as Independent Contractors

The distinction between a contract worker and an employee has serious repercussions for business owners, who are not required to provide benefits to contract workers or pay payroll taxes on their behalf. Employers who improperly classify their employees as independent contractors to avoid paying payroll taxes, minimum wage and overtime, face significant liability and penalties. California imposes statutory penalties of between $5,000 and $15,000 for each “willful” violation, in addition to liability for back wages and back taxes.

The general rule is that an individual is an independent contractor if the payer has the right to control only the result of the work, not what will be done or how it will be done, according to the IRS.

Contract Alone Does Not Make Someone a Contract Employee

An employee is not considered a contract worker just because an employer has filed a 1099 or has a contract. The IRS says employers should consider a range of factors in determining whether a worker is an employee or an independent contractor. These include:

  • Does the company control what the worker does and how it is done?

  • Are the business aspects of the job, like expense reimbursement, controlled by the company?

  • Is the work a key aspect of the business?

Further complicating the issue is the fact that different laws may apply to different situations, leading to the same worker being classified as an employee under one set of laws and a contractor under another, according to the California Department of Industrial Relations.

For help in determining the proper classification of an employee, you should contact an attorney who specializes in labor law.

Need Help Managing Your Payroll Tax Obligations?

Keeping up with your payroll tax obligations can feel like a second job, especially if a multistate workforce requires you to stay on top of a changing legal landscape in multiple jurisdictions. At Asure, we take the worry out of payroll tax compliance, with expertise that extends to more than 11,000 taxing agencies across the United States.

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