Independent Contractor or Employee?
Business owners often qualify their workers with the IRS as independent contractors instead of employees. The benefit to the employer is obvious – no payroll tax, minimum wage, overtime, meal periods and rest breaks, and no responsibility for things like unemployment insurance, disability insurance, or social security. However, although the temptation to classify a worker as an independent contractor can be alluring, an improper classification of an employee can have severe consequences for those who do so.
California typically begins with the presumption that worker is an employee rather than an independent contractor in cases where employment status is an issue. Importantly, a written agreement stating that someone is an independent contractor or employee is not conclusive with respect to independent contractor or employee status.
The leading California case on this topic is S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341. In that case, the California Supreme Court developed the so-called “economic realities” test, which states that the most significant factor is the degree of control over the work and the way in which the work is to be done. The Court also outlined 11 additional factors to be considered:
- 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 the employer does not control the work details, and employer-employee relationship can still be found. Furthermore, the penalties for violations can be severe and can include liability for things like:
- back pay and unpaid overtime;
- losses related to the employee’s share of payroll taxes, benefits, and insurance;
- “liquidated damages” in an amount equal to unpaid wages;
- statutory penalties; and
- attorney’s fees and costs.
For these reasons, it is extremely important that a business owner thoroughly examine each working relationship before labeling a worker as an employee or independent contractor. A qualified attorney can assist you in making this determination and avoiding significant headaches and expenses down the road.