EMPLOYEE OR INDEPENDENT CONTRACTOR? IT’S NOT SO SIMPLE

I often hear people state matter-of-factly that they have hired independent contractors to do some work for them, relishing the fact that they don’t have to worry about payroll, employer withholdings, and those pesky wage and hour laws (the existence of an employer-employee relationship is necessary in order to invoke wage and hour protections under California law).  Generally, the more they tell me about it, the less convinced I am that the people they’ve hired are truly independent contractors.  And I can assure you that the ramifications of misclassifying workers as independent contractors rather than employees can be very expensive!

So what is an independent contractor?  This article will briefly explore the factors which courts and the Division of Labor Standards Enforcement (a division of the California Department of Industrial Relations) use in determining whether a working relationship is “independent contractor” or “employer-employee.”  I will focus on California law, which is not greatly different than federal law, and as a general matter the same result will likely (though not always) be reached.

For many years California courts have invoked a “right of control” test to determine whether a worker is an employee or an independent contractor.  The California Supreme Court, in S.G. Borello & Sons v. Department of Industrial Relations (1989) 48 Cal.3d 341, articulated the “right of control” test, while also recognizing its limitations: “The principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired . . . .  However, the courts have long recognized that the ‘control’ test, applied rigidly and in isolation, is often of little use in evaluating the infinite variety of service arrangements.  While conceding that the right to control work details is the ‘most important’ or ‘most significant’ consideration, the authorities also endorse several ‘secondary’ indicia of the nature of a service relationship.”  S.G. Borello & Sons, 48 Cal.3d at 350.

Thus, employers must also consider, at a minimum:

  • Whether the employer has the right to discharge the worker at will, without cause;
  • Whether the one performing services is engaged in a distinct occupation or business;
  • Whether the kind of occupation 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 worker 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 the work is a part of the regular business of the principal;
  • Whether the parties believe they are creating the relationship of employer-employee;
  • The worker’s opportunity for profit or loss depending on his or her managerial skill;
  • Whether the service rendered is an integral part of the alleged employer’s business.

All of the above factors, and perhaps more, should be evaluated before classifying a worker as an independent contractor.  It is critical to recognize that there is no bright-line test.  Keep in mind that not every factor may apply to a given relationship.  It is important to seek professional advice on this issue.

The best approach is: If in doubt, classify the worker as an employee.