Independent Contractor of Employee? A Summary of the California Law.
For small businesses, hiring independent contractors is widely used practice because of their cost efficiency. Independent contractors, do not need to be given the benefits of a normal employee as they are not protected under California’s wage and hour laws. But , the division between an employee and an independent contractor is often misunderstood.
For example, simply because a worker is not an independent contractor simply because they want to be one. Nor is a written contract classifying the worker as an independent contractor enough. The language used can still be influential in court, however words such as “worker", “client" and “service provider" are usually associated with an independent contractor while words like “hire" show and employee-employer relationship. But it is still important to remember this type of language in a contract does not provide security against mislabeling a worker.
This confusion can create numerous issues involving liability and violation of California wage and hour laws. Furthermore, Government agencies such as the IRS, Labor Standards Enforcement, or the Employment Development Department may also prosecute for misclassifying a worker. These penalties include stop orders, which prevent an employer to from using employee labor until compliance with Labor Code § 3700. Additionally tax liability and penalties are likely to be brought against an employer for failing to properly pay an employee. Worst of all, criminal charges could even be brought on the company under Labor Code § 3700.5. This means large fines could be levied against the employer and jail time of up to one year could be given.
As previously discussed, the distinction between an independent contractor and an employee can be ambiguous, but reviewing California case law helps make it more clear. The courts have consistently held that the most crucial aspect in determining whether or not a worker is an independent contractor in California is the “control test".
The control test looks at who has primary control over the work being done. For instance, should a worker be responsible for shaping how majority of any particular piece of work is done then they would be considered an independent contractor. Likewise, if a worker is not be responsible for majority of their work then they would be considered an employee of the company.
Key elements of the control test were addressed in a case entitled S.G. Borello & Sons v. Dept. of Industrial Relations. The “Borello test", as it has come to be known, relied on eight factors,which are as follows:
- whether the one performing services is engaged in a distinct occupation or business;
- 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 skill required in the particular occupation;
- whether the principal or 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 or not the work is a part of a regular business of the principal;
- whether or not the parties believe they are creating the relationship of employer-employee.
Typically the Borello test is used for cases involving wage and hour laws, state discrimination, and harassment in California state courts. However, for a case in federal court the “economic realities test" is used instead. Similar to the Borello test, this test has six factors, which are:
- the degree of the alleged employer’s right to control the manner in which the work is to be performed;
- the alleged employee’s opportunity for profit or loss depending upon his or her managerial skills;
- the alleged employee’s investment in equipment or materials required for his or her task, or his or her employment of helpers;
- whether the service rendered requires a special skill;
- the degree of permanence of the working relationship;
- whether the service rendered is an integral part of the alleged employer’s business.
In both tests, each of the factors are weighed on a case by case basis, so it can be difficult to determine close cases. Regardless, these tests give employers a basic guideline for judging the type of worker relationship they have. As one can see, control is the strongest theme throughout the Court’s tests and thus the most important for an employer to identify. Successfully identifying who is controlling the means of any project given to a worker is essential in classifying them as an independent contractor or employee.