Welcome everyone to an edition of the Global Tech Law Newsletter. No, you are not getting this newsletter in error! You are not getting spammed.
China Tech Law Newsletter, the blog you love and read every week by Art Dicker has expanded to become the Global Tech Law Newsletter! We're still going to have plenty of articles that have a connection to China and Asia, but the theme is now on legal issues which cut across geographies for tech companies.
Let's get started on an issue I've seen more and more here in the U.S. - the question of engaging people as independent contractors.
Many early stage companies like the flexibility that comes with engaging someone as an independent contractor instead of hiring him or her as an employee with benefits such health care and Social Security and Medicare contributions.
But if a company is not careful, someone classified as a contractor may actually be deemed an employee, if ever challenged. Penalties may include back pay, overtime compensation, unpaid employee benefits, liquidated damages, and monetary penalties. While in good times, these classifications may fly under the radar, in bad times, a complaint may come from a disgruntled "employee".
California in particular takes an aggressive approach. California of Assembly Bill 5 a.k.a. AB5 in 2020 has made it much more difficult to hire freelancers in general. The test under AB5 is a stricter version of the more general ABC test for determining if someone is an employee or a contractor.
The key concept under the test is that anyone that is doing work that is within the "usual course of the company's business" should be deemed an employee, not a contractor. That is usually a hard argument for the company to win.
Still there are certain indicative factors that make a relationship look more like a contractor and less like an employee. For example, the contractor:
(1) Is engaged on a project basis, with a fixed fee not an hourly wage
(2) Has discretion to hire and fire people on his/her own external team in performing the work
(3) Uses his/her own tools and other equipment and purchases those items as their own expense.
(4) Is engaged by other clients for similar work, not working exclusively for the company
(5) Has discretion on the how part of getting the work done, the company only sets the results it wants to contractor to try to achieve.
(6) The contractor is setup as an LLC with separate business bank account, website, etc.
(7) The contractor has their own business cards (not business cards of the company), letterhead, invoices, etc.
It goes with saying you should also avoid hiring former employees as contractors without significantly changing their duties and time expectations. Try to avoid inviting contractors to "team building" events, letting them manage any of your own employees, or giving them regular employee benefits such as paid holidays and sick leave. Suffice it to say there is no bright line test here, but a bunch of factors when put together give someone enough reasons to argue they should be treated as an employee.
That's it for today, stay tuned for more posts coming up shortly. And as the number of subscribers has grown, I'm going to start doing some Q&As with people I feel are true experts in their domains and which offer value to subscribers here - for example, how companies actually try to reshore and "remember" how do manufacturing in the U.S. That's just one example of an upcoming post. Stay tuned, things are going to get very interesting!
*This blog may be considered attorney advertising. It is for informational purposes only and does not constitute legal advice.