Several years ago Microsoft mistakenly classified employees as independent contractors. When a class action case ruled that these “independent contractors” were really employees, Microsoft had to issue millions of dollars in back stock options. Employers continue to mistakenly erroneously classify employees as independent contractors. This can result in significant liability and serious penalties as Air Couriers International (aka Sonic) found out when it received an EDD assessment exceeding $600,000.00 (including penalties).
In Air Couriers International v. Employment Development Department published earlier this month, a California Court of Appeals re-emphasized the difficulty in correctly assessing a worker’s independent contractor/employee status.
Sonic believed its drivers were independent contractors. The drivers signed independent contractor agreements, drove their own vehicles, maintained their own insurance, decided which hours to work and which routes to drive, could work for other employers and/or decline jobs from Sonic, were often paid on a per-job basis, could negotiate different rates for different jobs, received no formal training and did not have to wear company uniforms, badges or have placards on their vehicles. The drivers also did not receive vacation, sick leave, bonuses or health insurance from Sonic.
The EDD disagreed, finding that most drivers did not work for more than one company, did not turn down jobs and were concerned about possible retaliation if they did turn down jobs, had very little ability to negotiate payment terms, only delivered to Sonic customers, were trained by current Sonic employees, usually wore Sonic uniforms and badges, did not have their own business licenses, and used Sonic’s packaging tape and forms. Many of the drivers testified that they could not recall ever signing an agreement or having their “independent contractor” status explained to them.
The trial court and the Court of Appeals upheld the EDD’s assessment. The Appellate Court not only reiterated the factors to consider, they also clarified that the analysis is the same regardless of whether you are considering a worker’s status under unemployment insurance or workers’ compensation. The court analyzed the evidence under Empire Star Mines o. v. Cal. Empl. Com (1946) 28 Cal. 2d 33, 43 and Tieberg v. Unemployment Insurance Appeals Board (1970) 2 Ca.3d 943. The court discussed the fact that the Borello factors (from S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal. 3d 341) commonly used by the Labor Commissioner are essentially the same as the Empire Star factors.
Under Borello and Empire Star, the most important factor is the right to control the manner and means of accomplishing the result desired. If the employer has the authority to exercise complete control, regardless of whether that right is exercised with respect to all details, an employer-employee relationship exists. The Borello court placed additional emphasis on the previously adopted secondary factors enumerated in Empire Star:
- Whether or not the one performing services is engaged in a distinct occupation or business;
- The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
- The skill required in the particular occupation;
- Whether the principal or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work;
- The length of time for which the services are to be performed;
- The method of payment, whether by the time or by the job;
- Whether or not the work is a part of the regular business of the principal; and
- Whether or not the parties believe they are creating the relationship of employer-employee.
The presumption is that workers are employees, not independent contractors. The employer bears the burden of proving the relationship is something other than employer-employee. In situations where the work to be performed requires a contractor’s license, there is an even stronger presumption of an employer-employee relationship. To increase the chance that a worker will be considered an independent contractor, employers should ensure:
- There is a clear agreement identifying the work as an independent contractor;
- The agreement states that the worker is responsible for having a business license and insurance;
- The worker provides proof of workers’ compensation insurance (if applicable), general liability insurance with the employer named as a beneficiary, and a business license;
- The agreement does not restrict the workers’ ability to work for other employers except to the extent necessary to protect the employer’s confidential, proprietary or trade secret information;
- The worker is responsible for purchasing and supplying his or her own tools;
- The worker does not be performing the same type of work that the employer’s employees are performing;
- Whenever possible, the employment is for specific projects and the worker is paid by the project not by the hour;
- The relationship is not terminable at-will;
- The employer refrains from controlling how the worker does the job, and instead focuses on controlling only the results of the work;
- The worker is free to set his or her own schedule and work at a location of the employee’s choosing whenever possible; and
- The agreement allows the worker to hire other people to perform the work.
While there are no guarantees that the EDD, the Labor Commissioner, the IRS or the worker will not later decide to argue that the worker was an employee, following these guidelines will give the employer a fighting chance of establishing the worker is an independent contractor.
Original article by Robert E. Nuddleman of Phillip J. Griego & Associates
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