Independent Contractor or Employee? A Common Trap for Employers

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One of the most common employment disputes and claims that our Orange County employment attorneys deal with is the question of whether a given person should be paid as an independent contractor or as an employee. Our corporate clients often ask us this question. Superficially, there are many advantages to a company if it pays a person as an independent contractor. Record keeping, compliance with various wage and hour requirements, and tax withholding and reporting are vastly simpler for independent contractors than for employees. Employers usually do not provide worker’s compensation insurance or social security withholding and matching to independent contractors.

Unfortunately for employers, there is a legal, rebuttable presumption that a given worker should be an employee rather than an independent contractor. Put simply, this is what the Government wants. Countless Federal and California Governmental agencies are ready to give an employer a fight about this issue and impose fines and penalties for misclassifying a worker as an independent contractor. The Government usually wins these fights. The cost of misclassifying a worker and losing a fight with the Government over this issue can be high.

How to Determine if a Worker Should Be an Employee or Independent Contractor. There is no hard and fast rule, and there is no set definition for “independent contractor.” The single most important factor to be considered is whether the employer or principal has control or the right to control the worker both as to the work done and the means in which it is performed. The California Department of Industrial Relations sets out 11 questions which must be considered in determining whether a company may classify a worker as an independent contractor.

1. Whether the person performing services is engaged in an occupation or business distinct from that of the principal
2. Whether or not the work is a part of the regular business of the principal or alleged employer
3. Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work
4. The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers
5. Whether the service rendered requires a special skill
6. 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
7. The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
8. The length of time for which the services are to be performed
9. The degree of permanence of the working relationship
10. The method of payment, whether by time or by the job
11. 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 company does not control work details an employer-employee relationship will be found if (1) the principal retains pervasive control over the operation as a whole, (2) the worker’s duties are an integral part of the operation, and (3) the nature of the work makes detailed control unnecessary. (Yellow Cab Cooperative v. Workers Compensation Appeals Board (1991) 226 Cal.App.3d 1288).

What This All Means

What this all really means is that unless a company is very sure that a person should be paid as an independent contractor, it is vastly safer to make the worker an employee, with all the costs that entails. If your business has issues concerning this question, our experienced employment law attorneys at Buffington Law Firm can help you resolve them.