In my previous post, I talked about the recently-passed California Proposition 22, how it relates to Assembly Bill 5, and the three criteria that Assembly Bill 5 uses to determine whether a worker is an employee or an independent contractor. As a reminder, those three criteria are as follows:
(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
(B) The person performs work that is outside the usual course of the hiring entity’s business.
(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
So when does it make sense for a company to contract with an independent contractor, rather than hire an employee?
The most obvious reason for a company to use an independent contractor is when the contractor provides services that are outside what the company usually does.
I could provide a whole list of examples of what those “services” could look like, but let me focus on a single example.
Wendy’s Widget Company has been manufacturing round green widgets since 1969, from a factory in Columbus, Ohio. (For various reasons, foreign or overseas round green widget manufacture was not desirable.)
One day, someone in a quality circle (Wendy’s Widget Company was old school) suggested that the company introduce square blue widgets. Square blue widgets had been around for a while, but Wendy’s Widget Company had never produced them.
The company decided to produce a small run of square blue widgets, and then get someone to market them.
But the company’s existing marketers were all accustomed to round and green things, and were incapable of marketing the square blue ones. (Not that they didn’t try, but the marketers did not understand the concept of 90 degree angles, so the effort was doomed to failure.)
The company could have hired an square blue widget expert, but what would have happened if the small run experiment was a failure, and the expert would have been terminated in a few weeks?
So the company hired an independent contractor to complete a well-defined project. This project required the contractor to develop marketing materials for a possible Wendy’s Widget Company square blue widget. The contractor would go off and work on the assignment, checking in with Wendy’s Widget Company at well defined checkpoints.
But when the company lawyer found out that the contractor was based in California, the lawyer asked, “Does this meet California AB5 criteria?”
- In this case, the contractor was NOT under the direct control of Wendy’s Widget Company. The contractor was not told to work from 8:00 am to 5:00 am Ohio time, was not assigned a Wendy’s Widget Company computer, and did not get matching contributions to the company’s 401(k) plan.
- And, in this case the contractor was performing work outside the usual course of business for Wendy’s Widget Company. The contractor not only had in-depth knowledge of 90 degree angles, but also had a deep appreciation of the music of both Bobby Vinton AND Eiffel 65.
- Finally, in this case the contractor regularly worked with a variety of companies to provide marketing materials for widgets of all shapes and colors.
The lawyer was satisfied, the contract was completed, and the contractor went on to help another company with its red octagon widgets. Everyone was happy.
OK, that whole example was made up. (But now I’m hungry for a hamburger.)
But there are times when a company wants to pursue something outside of its comfort zone, but doesn’t want to dedicate an employee to do it.