Employee vs. Subcontractor for Contractors in California

In the construction industry, contractors often hire additional help to assist them in completing projects. When hiring workers, it is vital for contractors in California to understand the distinctions between subcontractors and employees. The classification of workers carries legal and financial ramifications, impacting tax obligations, insurance coverage, and liability concerns.

This article provides a comprehensive and detailed overview of the differences between subcontractors and employees for contractors in California, including key factors to consider when making distinctions.

What are subcontractors?

In the contracting industry in California, a subcontractor refers to an individual or business entity that is hired by a contractor to perform specific tasks or complete a portion of a larger project. Unlike employees, subcontractors work independently and maintain control over how and when they perform the contracted work. They are responsible for providing their own tools, equipment, and materials needed to complete the work.

Key characteristics of a subcontractor in the contracting industry in California are:

1. Independent Work: Subcontractors work autonomously and have control over the means and methods of completing the contracted work. They have the freedom to determine their own schedule and are responsible for managing their own business.
   
   
2. Specialized Services: Subcontractors typically possess specialized skills, expertise, or equipment that are required for a specific task within a project. The contractor hires them for their unique capabilities rather than general labor.
   
   
3. Self-Employed: Subcontractors are considered self-employed individuals or separate business entities. They are responsible for handling their own taxes, insurance, and other administrative obligations.
   
   
4. No Employment Benefits: Unlike employees, subcontractors are not entitled to traditional employment benefits. They are not covered under workers' compensation, unemployment insurance, or eligible for benefits such as overtime pay, paid leave, or health insurance provided to employees by the contracting company.
   
   
5. Contractual Relationship: The relationship between the subcontractor and the contractor is governed by a written contract that specifies the scope of work, payment terms, and other relevant terms and conditions.
   

What are employees?

In the context of the contracting industry in California, an employee refers to an individual who is hired and works directly for a contractor or a contracting company. The relationship between the employee and the contractor is characterized by a mutual agreement, where the contractor has control and authority over the employee's work and how it is performed. Employees generally work under the direction and supervision of the contractor, receive training provided by the contractor, and use tools, equipment, and materials provided by the contractor.

Key characteristics of an employee in the contracting industry in California include:

1. Control and Supervision: The contractor has the right to control the work performed by the employee, including the methods, timing, and processes involved. The contractor provides instructions and guidance on how the work is to be done.
   
   
2. Tools and Materials: The contractor typically provides the necessary tools, equipment, and materials required for the job. The employee does not need to invest in or supply their own tools of the trade.
   
   
3. Training and Development: The contractor is responsible for providing any necessary training to the employee, ensuring that they have the required skills and knowledge to perform the job.
   
   
4. Integration: The employee is integrated into the contractor's business operation, working as part of the overall workforce. They may work on multiple projects for the same contractor and are subject to the contractor's policies, rules, and regulations.
   
   
5. Employment Benefits: Employees are generally entitled to certain employee benefits such as workers' compensation, unemployment insurance, Social Security and Medicare contributions, and overtime pay as per applicable labor laws in California.
   

Differences between subcontractors and employees

Here are the main differences comparing and contrasting between subcontractors and employees in the California construction industry.

Factors Considered in Determining Worker Classification

Control and Independence:

• Subcontractors have the freedom to determine how, when, and where they complete their work, indicating a greater level of independence.
• Employees are under the direct control and supervision of the contractor, who determines work hours, procedures, and methods.

Skill and Specialization:

• Subcontractors typically possess specialized skills or expertise related to their work and are hired for their specific talents
• Employees, while skilled in their respective roles, are often part of a contractor's general workforce and may perform a variety of tasks.

Duration and Project-Based Work:

• Subcontractors are commonly hired for specific projects or a fixed duration, with defined goals and deliverables
• Employees generally have long-term or ongoing working relationships with contractors, regularly engaging in similar tasks without a predefined end date.

Ability to Delegate and Subcontract:

• Subcontractors usually maintain the right to assign their work to others or hire employees to assist them.
• Employees are directly assigned and supervised by the contractor and are unable to hire or subcontract out their work.

Specific Ways to Classify Workers

In September 2019, Governor Newsom signed Assembly Bill (AB) 5 into law to address the employment status of workers who are classified as independent contractors by their hiring entity.

AB 5 implements the "ABC test", which is used to determine if workers in California should be classified as employees or independent contractors according to the Labor Code, Unemployment Insurance Code, and Industrial Welfare Commission wage orders. 

The ABC test consists of three conditions: 

1. the worker is free from the control and direction of the hiring entity
2. the worker performs work that is outside the usual course of the hiring entity's business
3. the worker is engaged in an independently established trade, occupation, or business that is similar to the work they perform for the hiring entity.

If you want more specific information on the ABC test, visit the California Department of Industrial Relations website here.

The California Supreme Court provides detailed explanations and examples for each part of the ABC test to help determine the employment status of workers.

Legal Implications of Misclassification

Payroll Taxes and Benefits:

• Misclassifying workers can result in penalties for contractors if they fail to withhold and pay required payroll taxes.
• Employees are generally entitled to benefits such as minimum wage, overtime pay, paid sick leave, and family leave.
• Subcontractors are responsible for paying their own taxes and benefits.

Workers' Compensation and Liability:

• Contractors must provide workers' compensation insurance coverage for employees, protecting them in case of work-related injuries or illnesses.
• Subcontractors are responsible for obtaining their own workers' compensation insurance and assume liability for their employees or themselves.

Independent Contractor Lawsuits:

• Misclassified workers may file lawsuits seeking employee benefits and protections if they believe they were incorrectly classified as subcontractors.
• Contractors face potential legal consequences, including paying back wages, penalties, and other damages.

Properly Classifying Workers

Legal Requirements and Documentation:

• Contractors should become familiar with California's Labor Code, as well as the guidelines provided by the Employment Development Department (EDD) and the Division of Labor Standards Enforcement (DLSE).
• Documentation, such as written agreements and independent contractor identification forms, helps demonstrate the intent and understanding between contractors and subcontractors.

Consultation and Professional Advice:

• It is recommended to consult legal and tax professionals knowledgeable about employment and labor laws in California to ensure proper worker classification.
• Seeking expert advice can assist contractors in designing appropriate contracts and avoiding potential legal pitfalls.

Conclusion

Ultimately, it is important to note that the classification of a worker as an employee or subcontractor is subject to specific tests and guidelines set forth by the California Labor Code and relevant regulatory bodies. These definitions and factors may vary based on the specific circumstances of each case, and it is advisable to consult with legal professionals or labor experts familiar with California labor laws for accurate guidance.

In California, understanding the distinction between subcontractors and employees is crucial for contractors. Accurate worker classification ensures compliance with state labor laws, reduces potential legal liabilities and penalties, and allows contractors to properly manage their workforce. By considering factors such as control, independence, skill, and duration, contractors can make informed decisions and avoid misclassifying workers. Consulting legal and tax professionals provides further guidance and helps contractors navigate the complexities of worker classification, ensuring compliance and fostering stronger business operations.