Georgia asks about new developments in the area of Independent Contractors vs. Employees both from the IRS perspective and EDD. Improperly characterizing an employee as an independent contractor can have some significant negative effects. Not only will the worker be entitled to all of the protections that come with being an employee (e.g., overtime, timely payment of wages, reimbursement of expenses, protection from discrimination, etc.), the employer could be subject to significant penalties by the EDD, the IRS, the Franchise Tax Board, and the Department of Industrial Relations. Additionally, you may end up losing workers’ compensation coverage when the insurance company realizes the workers were misclassified.
The New York Times recently reported that “Federal and state officials, many facing record budget deficits, are starting to aggressively pursue companies that try to pass off regular employees as independent contractors.” The same article indicates that the President’s 2010 budget “assumes that the federal crackdown will yield at least $7 billion over 10 years. More than two dozen states also have stepped up enforcement, often by enacting stricter penalties for misclassifying workers.”
Chintamani Abhyankar, author of “Stop Donating your Money to IRS,” reports that the IRS has begun a three-year audit of 6,000 randomly chosen businesses of all types, sizes, and shapes to investigate any sort of suspicion of tax infractions. According to Abhyankar, “they believe that the IRS is just gearing up for a run at businesses under the new administration.”
The Division of Labor Standards Enforcement (Labor Commissioner) provides the following caution:
There is no set definition of the term “independent contractor” and as such, one must look to the interpretations of the courts and enforcement agencies to decide if in a particular situation a worker is an employee or independent contractor. In handling a matter where employment status is an issue, that is, employee or independent contractor, DLSE starts with the presumption that the worker is an employee. Labor Code Section 3357. This is a rebuttable presumption however, and the actual determination of whether a worker is an employee or independent contractor depends upon a number of factors, all of which must be considered, and none of which is controlling by itself. Consequently, it is necessary to closely examine the facts of each service relationship and then apply the law to those facts. For most matters before the Division of Labor Standards Enforcement (DLSE), depending on the remedial nature of the legislation at issue, this means applying the “multi-factor” or the “economic realities” test adopted by the California Supreme Court in the case of S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341. In applying the economic realities test, the most significant factor to be considered is whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker both as to the work done and the manner and means in which it is performed. Additional factors that may be considered depending on the issue involved are:
- Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
- Whether or not the work is a part of the regular business of the principal or alleged employer;
- Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
- The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
- Whether the service rendered requires a special skill;
- 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 alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
- The length of time for which the services are to be performed;
- The degree of permanence of the working relationship;
- The method of payment, whether by time or by the job; and
- Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.
Even where there is an absence of control over work details, an employer-employee relationship will be found if (1) the principal retains pervasive control over the operation as a whole, (2) the worker’s duties are an integral part of the operation, and (3) the nature of the work makes detailed control unnecessary. (Yellow Cab Cooperative v. Workers Compensation Appeals Board (1991) 226 Cal.App.3d 1288)
Other points to remember in determining whether a worker is an employee or independent contractor are that the existence of a written agreement purporting to establish an independent contractor relationship is not determinative (Borello, Id.at 349), and the fact that a worker is issued a 1099 form rather than a W-2 form is also not determinative with respect to independent contractor status. (Toyota Motor Sales v. Superior Court (1990) 220 Cal.App.3d 864, 877)
The problem is compounded by the fact that different agencies can come to different conclusions. That same article makes it clear that the Labor Commissioner and the EDD do not always agree on what is an employee versus what is an independent contractor:
Q. How can it be that the Labor Commissioner determined I was an employee with respect to a wage claim I filed and won, and the Employment Development Department (EDD) determined I was an independent contractor, and denied my claim for unemployment insurance benefits?
A. There is no set definition of the term “independent contractor” for all purposes, and the issue of whether a worker is an employee or independent contractor depends upon the particular area of law to be applied. For example, in a wage claim where employment status is an issue, DLSE will often use the five-prong economic realities test to decide the issue. However, in a separate matter before a different state agency with the same parties and same facts, and employment status again being an issue, that agency may be required to use a different test, for example, the “control test,” which may result in a different determination. Thus, it is possible that the same individual will be considered an employee for purposes of one law and an independent contractor under another.
Even court decisions are not always helpful. In Messenger Courier Ass’n of the Americas v. CUIAB, 175 Cal. App. 4th 1074 (2009) the court found that messengers were properly characterized as employees. But in Cristler v. Express Messenger Systems, Inc., 171 Cal. App. 4th 72 (2009), another messenger case, the messengers were independent contractors.
The reality is that if you are using independent contractors to perform the same work as your employees, or if the independent contractors are doing the work that you are in business to perform, you should speak with an attorney knowledgeable about proper classification.
Phillip J. Griego & Associates 95 South Market Street, Suite 520 San Jose, CA 95113 Tel. 408-293-6341Original article by Robert E. Nuddleman of Phillip J. Griego & Associates
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Great information. Consistent with what we’ve been reading. As attorneys what preventative measures can you suggest to your readers that they can take to mitigate or prevent these actions and misfortunes.
The first thing I can suggest is to be familiar with the various tests. For California employers I suggest becoming familiar with the tests used by the EDD and the tests used by the Labor Commissioner. They have similarities, but there are differences. The EDD has a helpful pamphlet that helps you understand and apply the different factors called the de38. It can be found on their website. The Labor Commissioner test is described on the page above and lists the factors I delineated.
Keep in mind that the presumption is that the workers are employees. It is the employers burden to prove an independent contractor relationship. And just because a worker believes he or she is an independent contractor when they start the relationship is no guarantee that the worker will later confirm that belief or that the government agencies will agree.
If you have applied the various tests to your situation and it is a close call, you will have to decide if the risk of calling the workers independent contractors is worth the reward. Sometimes it is, but oftentimes it is not.
A classic independent contractor is someone you hire to come in and do something that you are not in business to do. A plumber, for example, will come in an fix the pipes at our law firm and there will be no question that the plumber is an independent contractor. But if I hire a “contractor” attorney to come in and represent my clients or to write my briefs then the line becomes blurred.
Sometimes a company can make slight changes to how they do business with the contractor so that the contractor is more clearly a true independent contractor. For example, let’s say you have an accounting firm. If you hire a CPA to come in during tax season and help prepare tax returns for the firm’s client, the law is likely going to say the CPA is your employee even if the CPA has his own clients. The CPA will be doing the work that the firm is in business to perform and may even be using the tools provided by the firm (i.e. computer, software, customer base). What if, and I’m just hypothesizing here, the firm referred those same clients to the CPA under a fairly strict agreement wherein the CPA serviced the clients through his own company and paid the firm a referral fee. This way the client is hiring the CPA directly, not hiring the firm which then farms the work out to the CPA. This small change alters the dynamics so that the firm is not even hiring the CPA and I believe a government agency would be less likely to believe the CPA is an employee of the firm. When does an employee ever pay the employer for the work?
When in doubt, err on the side of caution. If you must use independent contractors that are not clearly independent contractors you should do your best to adhere to employment laws that would apply if the worker is held to be an employee. Make sure the independent contractor does not work overtime or is otherwise exempt from the overtime laws. Make sure the worker takes regular breaks,etc. At least then you are minimizing your exposure to the worker, if not to the governmental agencies.
As always, have a relationship with a qualified attorney or HR professional knowledgeable about classification issues. Talking with a professional before there is an issue can oftentimes help you come up with solutions before problems become overwhelming.
What about an instance where someone is a “booth renter” in a building. The “booth renter” is not under the control of the principal/employer, their policies or required to endorse/sell their products and only rents the space to perform their business.
The circumstances dictate that the “booth renter” is providing a service independent from the control of the principal/employer. The “booth renter” controls their own schedule, maintains and urchases their own “tools” and they provide the same service(s) the principal/ employer is in business for. Does that change the definition considerably?
I ask because this has recently been brought to my attention at the place of business I work.
What is the classification for the “employee”/ “booth renter”/”independent contractor”?
Renting a booth, in and of itself, does not necessarily mean the worker is an independent contractor. For example, if the booth renter has his/her own business, handles his/her own marketing, handles his/her own finances and record-keeping, and is in a separate business from the entity leasing the space, then it is more likely the person is an independent contractor. I’ve seen other situations, particular in hair salons, where the entity leasing the space requires the “renters” to wear a common uniform, schedule appointments through a common front desk, collects the money for the services and takes a percentage of the fee before paying it out to the renter. While the renter in the second scenario is free to cut hair however he/she would like, the entity renting the space is still exerting a significant amount of control, and there is a greater risk the “renter” is really an employee.
Keep in mind that no single factor is necessarily determinative regarding the status of the worker. That’s part of what makes the analysis so difficult (that and the fact that each agency has it’s own definitional test).
So with what has been explained here, it seems impossible for lets say a package delivery business to use independant contractors? If the business is only in the business of package delivery and that business also has employee drivers doing the same work, then the business could not be classifying the IC’s properly. To add, most package delivery company’s do not hire out on a daily basis. Some IC’s have relationships that go on for years with the IC doing the same job delivering the same route and working out of the business’s faciltiy and this goes on for years. Another question here is what about tools that the business requires the IC to use?? Most business use scanners to track packages but is the business allowed to charge the IC for the use of that scanner? What about the issue of tracking and monitoring the IC by way of GPS that is installed in the scannner in addition to only paying the the IC by way of the scanner?? The scanner is the the IC’s invoice to the business and the IC is not permitted to turn in a separate invoice. It seems almost impossible for any package delivery company to utilize IC’s without the threat of misclassification.
I wouldn’t say it is impossible. It all depends on the circumstances. There have actually been several court decisions regarding messenger and/or delivery package companies that have come to opposite conclusions. The more control asserted by the primary company the more likely it is the workers should be classified as employees. For example, if the primary company requires the delivery people to wear specific uniforms, use specific equipment, adhere to specific schedules and drive company trucks, then the workers are likely employees. If, on the other hand, the primary company leaves it up to the delivery people to determine routes, equipment, clothing, etc., and the delivery people work for several different companies, then there is a chance the workers could be considered independent contractors. There’s nothing wrong with FedEx, for example, contracting with DHL to delivery packages in certain areas. The independent contractor/employee analysis has a lot of gray areas and is made even more complex by the fact that different agencies use different tests which could yield different results. Add on top of that a new California law that allows the Labor Commissioner to impose up to $25,000.00 in additional penalties for willfully misclassifying employees as independent contractors and you can see why this is an area of significant concern.