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Calif law will force small businesses to rethink staffing

NEW YORK — A California law that makes it harder for companies to treat workers as independent contractors takes effect next week, forcing small businesses in and outside the state to rethink their staffing.

The law puts tough restrictions on who can be independent contractors or freelancers rather than employees. Supporters say it addresses inequities created by the growth of the gig economy, including the employment practices of ride-sharing companies like Uber and Lyft that use contractors. Company owners with independent contractors must now decide whether to hire them as employees or look for help in other states. Another alternative: asking these workers to start their own businesses, a setup the law allows.

Although the law affects companies of all sizes and out-of-state businesses that use California contractors, it likely will have a greater impact on the many small businesses that have hired independent contractors because of limited staffing budgets.

Tamara Ellison has used independent contractors in both her consulting and construction businesses. She’s expecting to hire five of her consulting contractors as employees to bring her company into compliance with the law. But she’s also thinking she may have to limit the services she offers because not all her hires will have all the skills she needs for all her clients. She may also have to raise her prices, a worrisome proposition.

“Little companies just trying to start out won’t be able to afford our services,” says Ellison, whose Ontario, California-based company bears her name.

Ellison won’t need to hire her construction contractors; they’re subcontractors, a classification that complies with the new law.

The law approved by the California Legislature in September codifies a 2018 ruling by the state’s Supreme Court that said workers misclassified as independent contractors lose rights and protections including a minimum wage, workers’ compensation and unemployment compensation. The ruling came in a lawsuit brought against the delivery company Dynamex; workers around the country have complained that services like Uber and Lyft have misclassified them as well.

The law is being challenged in state courts, and companies including Uber and Lyft are campaigning for a referendum on the 2020 election ballot on whether they should be exempt from the law. And employment law attorneys expect the Legislature to add to the list of professions the law already excludes.

Independent contractors and freelancers have long been a sore point for federal and state officials who contend that many of these workers are doing work that employees do. When employers classify workers as independent contractors, they avoid taxes including the 6.2% of salary and wages companies must pay for Social Security and the 1.45% they must pay for Medicare. Employers must also pay for workers’ compensation and unemployment and disability insurance.

For many small business owners, especially those who do a variety of projects requiring different types of expertise, contractors provide more flexibility. Webconsuls, a digital marketing agency with offices in California and Tennessee, bases its hiring decision on the work it has and whether projects are long or short term.

“We may need a developer who specializes in a specific language to help us build one website,” managing partner John McGhee says. “If we don’t anticipate having to use that language again in the near future, we’ll hire a contractor to build the website.”

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