This. I run a sole proprietorship LLC for platform engineering consulting services.
I’ve had CA companies give me a hard “no” until they learned I was incorporated in AZ, living in AZ, and that a majority of the work would be performed remotely from AZ.
As I understand it (second hand from these companies) they open themselves up to liability under California labor law if it’s later determined that contracting/consulting work was “misclassified” and “should have been employment.”
I don’t personally know the reason for this, or what the liability is, but it seems like some companies are worried about having consultants/contractors later reclassified as employees. Me being in AZ has been the turning point for closing contracts though.
This kind of law exists because companies coerce people into becoming "freelancers", so the company doesn't have to pay benefits and can fire them at will, but then ask the "freelancer" to come to the office everyday, clock in and out in time, wear a badge, work 40h week, etc.
So lawmakers crack down on that, but law is a blunt instrument, and other valid situations can get more complicated.
But believe me, those laws are created 100% because companies abuse the concept of contractor.
I don’t have a stake in it. I’m not in CA and it doesn’t appear to impact me doing business with CA companies.
I imagine it’s a bummer for anyone trying to make their own way on their own terms in that state though. It might just be an unintended consequence, or maybe it doesn’t impact CA sole-proprietorships at all if they know the magic words to say or the right contracts to provide. Or perhaps it’s not as big of a deal as it sounded when they told me.
Just sharing my experience and saying I’m glad I live in AZ based on my limited knowledge.
The 1099-NEC form you receive instead of a W-2 for contractor income even has instructions for how to report your employer to the IRS if you think you've been misclassified as a contractor instead of an employee. I'm sure the IRS carefully investigates all such reports to secure every single penny Uncle Sam is owed in back taxes and penalties.
I’ve had CA companies give me a hard “no” until they learned I was incorporated in AZ, living in AZ, and that a majority of the work would be performed remotely from AZ.
As I understand it (second hand from these companies) they open themselves up to liability under California labor law if it’s later determined that contracting/consulting work was “misclassified” and “should have been employment.”
I don’t personally know the reason for this, or what the liability is, but it seems like some companies are worried about having consultants/contractors later reclassified as employees. Me being in AZ has been the turning point for closing contracts though.