Is your independent contractor really an employee?

Your company’s analysis of worker classification is important because of the difference in the nature of employee and independent contractor relationships, and the consequence for improper classification. This is largely because an employer has certain control rights and many obligations to an employee, that are not part of a principal-independent contractor relationship. As you may be aware, employees are entitled to a variety of benefits under various laws, such as unemployment benefits, workers' compensation, and unpaid leave. None of these are inapplicable to independent contractors.

Determining whether a person is an employee or independent contractor involves a 3 step process: 1) gathering information about the worker and the scope of the relationship; 2) applying the tests to the information gathered to determine whether the worker can properly be considered an independent contractor; and 3) if applicable, engaging the worker appropriately as an independent contractor.

Worker status determination requires analysis under 3 primary state and federal laws/tests (common law control test, the ABC test, and the economic realities test. Certainly feel free to ask for my assistance to determine classifications on a case by case basis if this issue arises again. For purposes of this post, we can apply the CA ABC test as it has the broadest coverage for employees, and is the test currently used in CA courts to decided wage and hour claims.

Under the ABC test initiated in Dynamex Operations W. v. Superior Court it is the employer’s burden to show that A) the worker is free from company control and direction in connection with the performance of the work, both under the contract for performance of the work and in fact; B) the worker performs work that is outside the usual course of the hiring entity's business; and C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring company.

If the relationship meets the standards described above I advise that your company and the independent contractor enter into a written independent contractor agreement. Let me know if I may be of assistance in drafting that agreement.

Once the independent contractor has been hired remember that your company is required to file a notice with the Employment Development Department (EDD) that the contractor has been hired. Once the amount paid to the contractor is >=$600 the Internal Revenue Service requires that you send the contractor a form 1099 for the previous tax year by January 31. If you are unfamiliar with this process, I can forward a link, or provide additional assistance. The penalties to both the worker and hirer for misclassification can be extensive if the California Labor Commissioner, the U.S. Department of Labor, or a court subsequently reclassifies the worker as a nonexempt employee. This may include failure to pay minimum wage and overtime, tip credits, attorney fees, and the like.