At the heart of the American economic and legal system is the relative freedom given to parties to contract with each other regarding the purchase and sale of goods and the delivery of services. For example, firms have historically been free to create business models that utilize independent contractors instead of employees – think Uber, Federal Express, delivery services, construction companies and trucking firms. The goal of the business is often to save employment taxes, overtime pay, workers’ compensation insurance premiums, and other employee-related expenses.
California Regulators Say Independent Contractor Designation is Often Unfair to Worker
In recent years, a number of states – particularly California – have determined that in all too many situations, the business firm is taking unfair advantage of the worker. The headlines have been filled with class action lawsuits and regulatory intervention. New laws have been passed. One California law now makes it clear that cheerleaders for professional athletic teams must be classified as employees; they are not independent contractors. Settlements in the millions of dollars have been negotiated with firms such as Uber and FedEx.
Steep Fines and Other Sanctions
All businesses should carefully examine their employment/contracting practices to make certain they are within the law. Violations can be expensive. Under current California law, the misclassification of employees as independent contractors can result in steep fines and other sanctions, including:
• Stop orders and penalty assessments pursuant to California Labor Code § 3710.1
• Tort liability for injuries suffered by employees when the business entity has failed to secure workers’ compensation insurance (see Labor Code § 3706)
• Exposure for unfair business practices
• Liability for overtime premium, meal period pay, and other remedies available to employees under the Labor Code
• Liability for additional taxes and penalties
• In some cases, criminal liability under Labor Code § 3700.5
Factors Generally Considered in Determining the Legal Nature of the Employment Relationship
Business owners should recognize that the issue of employee vs. independent contractor is an extremely fact-driven matter. No two businesses are identical. There is no single factor that governs the situation. Just because you have a contract that designates the workers as an independent contractor, it does not necessarily follow that a court or regulatory body will agree to your characterization. There are a number of issues that should be considered, including the following:
• Is the work of the so-called contractor integral to the business? If so, the worker is likely an employee and not an independent contractor.
• Does the worker operate a stand-alone business, with his or her own tax identification number, business bank account, business address, etc.? If so, he or she may be an independent contractor. If not, the situation points to an employee relationship.
• Is the worker to be paid by the job or the hour? If payment is made on a time basis, that points to an employee relationship.
• Does the contract work have a fixed beginning and ending date? If not, this tends to point toward an employee relationship.
• Does the worker require a specialized license? If so, that usually points toward independent contractor status. If not, the worker may be designated as an employee.
• Is the worker free to work for someone else? If so, that may point to an independent contractor relationship.
• Does the worker supply his or her own tools of the trade? If so, that points to an independent contractor relationship. If the business leases the tools to the worker, that points instead to an employee relationship.
• Does the work require skill? If so, that may point to independent contractor status.
• Is the worker’s job closely supervised? If so, that points to an employment relationship.
Employee Misclassification is Serious
As noted above, the penalties for misclassifying an employee can be serious and expensive. Many businesses determine that they need the counsel provided by an experienced lawyer to maneuver within the maze of employment regulations and laws. For years now, CKB VIENNA LLP has represented all sorts of businesses in employment law matters. Our team understands the complexity of the issues and stands ready to represent you aggressively. We have offices in Rancho Cucamonga, San Bernardino, and Los Angeles. Contact us by telephone – 909.980.1040 – or complete our online form.