Freelancer/ Independent Contractor
WHAT YOU NEED TO KNOW ABOUT THE LAWS FOR FREELANCERS IN CALIFORNIA
If you are freelancer (aka “independent contractor” or “subcontractor”), you are essentially your own small business (a sole proprietorship unless you set up a formal structure such as an LLC or corporation), and generally the law treats you as a business, not as an employee. So in general the employment laws don’t apply to you (unless your “client” is missclassifying you as an independent contractor – see below). But business laws do apply.
I’m not sure if I am a freelancer/independent contractor. How do I know?
Determining whether you are an independent contractor (aka freelancer) is sometimes complex, and you may want to get an employment lawyer if you are unsure. Many employers misclassify (whether intentionally or not) employees as independent contractors to avoid paying certain taxes and other benefits. The category you fit into has implications as to the laws that apply, as you will see below.
You may be an independent contractor if most of the following applies1Restatement (Second) of Agency §220 (1958). S. G. Borello & Sons, Inc. v Department of Indus. Relations (1989) 48 C3d 341, 256 CR 543:
a. You are retained for a specific period of time rather than indefinitely;
b. You have the freedom to set your own hours/schedule;
c. You use your own tools to do the job rather than using the company’s tools;
d. If the work you are performing is NOT part of the client’s regular business.
If you work in construction, there is a strong presumption that you are an employee unless you clearly run your own business.2Labor Code 2750.5
IRS classification may vary from other laws
In certain occupations, corporate officers and service providers are considered “employees” even if they qualify as independent contractors under other law.3IRC Sec. 3121(d)(1)
KEY LAWS TO KNOW
Do employment laws apply to independent contractors (freelancers)?
In general, no. You are generally free to contract with your clients to determine the “rules of engagement,” with some limitations. Here are some specifics:
- Wage and Hour laws do NOT apply to freelancers.4The National Labor Relations Act (29 USC Secs. 151–169) and the Fair Labor Standards Act (29 USC Secs. 201–219) do not apply.
- Freelancers are ineligible for unemployment insurance.5CA Unemployment Insurance Code Sec 656
- Most anti-discrimination laws do NOT apply to freelancers, except prohibition of harassment & sexual harassment.6CA Govt Code Sec 12940(j)
- As a freelancer, you may not sue for wrongful termination.7See Sistare-Meyer v YMCA (1997) 58 CA4th 10
As mentioned above, generally the main exception is that independent contractors ARE protected against harassment by the person engaging the independent contractor.8CA Govt Code Sec 12940(j)
Can my client prevent me from working for a competing company?
No, in California, an attempt to prevent another from going to work for a competing company, such as by “non compete” provision in an independent contractor services agreement, is invalid.9BPC 16600 The one main exception is that an owner of a business, as part of selling his/her ownership in the business, may agree to not carry on a similar business in the geographic area.10BPC 16601, 16602
However, this does not mean you can use confidential and proprietary information (aka “trade secrets”) you obtained from performing services for one company to your own benefit or for the benefit of another company. A related concept is that a company you perform services for may prohibit you from “soliciting” their clients, through a “non solicit” or “non solicitation” provision. But if the clients contact you on their own, the company can’t prevent this.
Taxes & filings
When do I pay tax as a freelancer?
As a freelancer or small business, you actually must pay taxes 4-5 times per year, not just once!
If you do NOT have a corporation or LLC (you are a “sole proprietor”), or if you are the sole owner of an LLC: you are generally required to file your tax return (and make payment) by mid April, and then make “estimated” quarterly payments without filing a return by mid June, mid September, and mid January.
If you have an LLC with multiple owners, or you have a corporation: you are generally required to file your LLC/corporate tax return (and make payment) by mid March, then your individual tax return (and make payment) by mid April, and then make “estimated” quarterly payments without filing a return by mid June, mid September, and mid January.
Do my clients need to send me any tax forms at all?
A business client which paid you $600 or more within a calendar year is required to send you a Form 1099-MISC (“1099”) by the following Jan 31 (but even if they don’t, you still must report the income on your taxes), and the business must file the 1099 with the IRS by Feb 28.
To help them fill out the 1099, your business clients may ask you to fill out a W-9 form, which asks for your basic information, including social security number.
However, if you as the freelancer are incorporated (not including LLCs), the business does not need to do the 1099.
The 1099 requirement only applies to clients who have used your services for their business, not for their personal use.
Do I need to send any tax forms for freelancers/subcontractors I hire?
Same as above, but you are the business client, and they are the freelancer. Note: If you have “employees” (see above for who are employees vs independent contractors), you would generally withhold taxes from each paycheck, and send a W-2 the following year by Jan 31.
Does a business need to tell the government when hiring a freelancer?
If a business is required to file a 1099 for a freelancer, that business may also need to file with the CA Economic Development Department stating that they hired the services of an independent contractor.
What are my intellectual property rights as a freelancer?
If you are creating any intellectual property (writing, art, design, etc.) for a client and you have not signed a contract stating that the copyright belongs to the client (“work for hire”), then the copyright by default belongs to you, NOT the client (see Copyright for explanation). The client would simply have a “license” to use the work.11CA Labor Code Secs. 2870, 3351.5(c))
- To protect your rights as a freelancer, you should get a good contract drafted by a lawyer to spell out exactly what the terms are when a client hires you.
- It may also be a good idea to form an LLC or corporation to protect your assets and possibly save on taxes.
- Talk to a lawyer for more info.
References [ + ]
|1.||↑||Restatement (Second) of Agency §220 (1958). S. G. Borello & Sons, Inc. v Department of Indus. Relations (1989) 48 C3d 341, 256 CR 543|
|2.||↑||Labor Code 2750.5|
|3.||↑||IRC Sec. 3121(d)(1)|
|4.||↑||The National Labor Relations Act (29 USC Secs. 151–169) and the Fair Labor Standards Act (29 USC Secs. 201–219) do not apply.|
|5.||↑||CA Unemployment Insurance Code Sec 656|
|6.||↑||CA Govt Code Sec 12940(j)|
|7.||↑||See Sistare-Meyer v YMCA (1997) 58 CA4th 10|
|8.||↑||CA Govt Code Sec 12940(j)|
|10.||↑||BPC 16601, 16602|
|11.||↑||CA Labor Code Secs. 2870, 3351.5(c))|