03 Dec Independent Contractors: the Money Pit
Margaret A.M. Heine
is the principal counsel at Heine Law Group in Fullerton, California. She is licensed in California and Washington and has authority to practice before the Supreme Court of the United States and the United States Court of International Trade.
INDEPENDENT CONTRACTORS: THE MONEY PIT
California has had a love hate relationship with the independent contractor status. Many companies prefer to hire independent contractors to alleviate themselves of payroll taxes and other mandated benefits payable to employees. It has been an easy way to expand the company workforce, and although the wages are generally higher, there is some savings in the saving on employee expenses.
The state has been very aggressive in penalizing companies who have classified workers as independent contractors, but whom the state has deemed to be employees. There has traditionally been a twelve step review as to whether or not a person was an employee or an independent contractor.
Independent contractors typically do not qualify for unemployment, employee health benefits, holidays, jury duty, paid time off, meal and rest periods. Independent contractors do not have any deductions from their pay for things like income tax, Medicare tax, or state benefits like SDI. This is why many workers prefer to be classified as independent contractors.
One of the issues that both employer and state have had in classification of workers is that there is no uniform, simple description or test to classification. In a recent court case Dynamex Operations West, Inc. v. Superior Court, the court tackles this problem and sets out when a worker is an independent contractor. One of the problems is that the independent contractor definition may be different for different entities and purposes, so, this is a new minefield for employers. The classification system for workers’ compensation, contractors state licensing board, and taxation may be different than the wage orders which were involved in this lawsuit. In addition, EDD has announced increased enforcement and fines relating to misclassification of workers as independent contractors.
Under the court ruling, a worker is an independent contractor if:
the employer doesn’t exercise the kind of control over the worker that it has over its employees;
the worker’s tasks are not integral to the hiring entities’ business;
the worker is engaged in an independent occupation or business and works to establish and promote an independent business
Straight forward? Maybe not. How do you work for a company and the company not
tell you what they want you to do? Can they tell you the format? How much can they control your work product? What is an “integral” service of the business? Bookkeeping? Sales? Shipping?
The Court seems to be making the decision that the independent contractor must be actively involved in business for themselves. So, who are their clients? Who do they work for? Do they maintain their own offices? What types of business expenses do they have? Have they assumed the risks and liabilities for their work?
The court has indicated that some professions lend themselves to independent contractor status: plumbers, equipment repair, IT. Some areas that would not be independent contractors would be home seamstresses who use cloth and patterns supplied by the manufacturer, even though they use their own equipment in their own home; cake decorators who work on custom-designed cakes. This will be a minefield of fine line decisions for employers.
The first test that an employer should ask is: “Does this person have their own business and work for other people?” If the answer is no, then they are not an independent contractor. If they have their own business, but work exclusively for the company, more than likely they will be found to be an independent contractor.
The second test for employers is: “Does this person do the same thing that my own employees do?” If they are a driver—even if they use their own vehicles or trucks—how are they getting assignments? getting paid? With Uber, Lyft, trucking companies, they are all in the business of moving people and freight. The drivers are basically doing their main business activity, and the courts have been holding that these drivers are not independent contractors but employees.
Just having an agreement that a worker is an independent contractor is not sufficient to establish that relationship. The same is also true with the issuing of a 1099 versus a W-2. The employer could still misclassify the relationship. Employers can be liable for fines and penalties up to $15,000 per employee, all of the taxes which should have been paid if the worker should have been classified as an employee, and all of the taxes which the independent contractor did not pay for themselves. They could also be liable for wage and hour and overtime for the newly determined employee rather than independent contractor. This can be a significant cost to a business, and the state is not very willing to trim penalties and fines and forego collecting tax revenue.
It is still possible in California to be an independent contractor for one purpose and an employee for another purpose. Massachusetts law has the same provision as California in the second consideration. In Massachusetts, they have found legitimate business to business relationships which qualify as independent contractors. California will likely follow suit, and as the new standards are applied, there will be more and more clarifications in the test. . Employers should review their classifications very carefully. Keep in mind that at this time, the test is for Wage Orders only. The interpretations of this test will be evolving with other exceptions and qualifications eventually carved out.