By: Richard E Korb©2011.[1]
During the last few decades, businesses, corporations and many other employers have hired workers who are not considered a full member of business operations. The workers are often presumed to set their own schedule, use their own methods, and use their own resources to get the job done. These independent contractors often perform many duties for the businesses which hire them, but are typically cheaper then a regular employee. Independent contractors are cheaper then employees because employment taxes are not applicable to independent contractors. In addition, employers are not required to pay certain benefits and expenses for independent contractors, benefits and expenses which full employees are entitled to under California law.
Thus, the temptation is strong for many employers to label most, if not all, their employees as independent contractors. However, a misclassification of employees as independent contractors may have dire results on employers. The IRS includes worker classification in most of their business audits and California Labor Code § 3700 provides that “Every employer except the state shall secure the payment of compensation.” Independent contractors are exempt from this requirement because independent contractors are considered self-employed; they are not controlled by their employers, but by themselves.
However, if an employer mislabels his employees as independent contractors, the employer is still required to pay for his or her employee’s compensation. Failure to do so would trigger California Labor Code § 3700.5 (a), which is a “misdemeanor punishable by imprisonment in the county jail for up to one year, or by a fine of up to double the amount of premium, as determined by the court, that would otherwise have been due to secure the payment of compensation during the time compensation was not secured, but not less than ten thousand dollars ($10,000), or by both that imprisonment and fine.” The best way to avoid this misdemeanor is to properly identify an independent contractor from an employee and to pay any taxes and benefits accordingly.
One of the reasons employers misidentifies an employee as an independent contractor is that a strict definition of an independent contractor is hard to locate. For example, the IRS, on its website, states that “the general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done or how it will be done.” This definition seems rather straight forward and is an accurate explanation of California’s “right of control” test, a test used by Courts in California to determine whenever or not an independent contractor is actually an employee. The test doesn’t require that the employer has to constantly look over the worker’s shoulder; it is enough that the employer has the right to tell the worker how to perform the job and that the worker must comply.
The test, first established by the case, S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989), consists of three factors: behavior control, financial control and the type of relationship between the employer and the worker. The first factor, behavior control, means when and how to do the work. The independent contractor can sometimes reject the work offer, work at his or her own schedule, and can use any legal methods to get the work done. The second factor, financial control, usually means that the independent contractor uses his or her own resources to complete the task given by the employer: expenses for tools, vehicles, gas, research, or other expenditures to perform the job are paid for by the independent contractor and are usually not reimbursed by the employer. The third factor, type of relationship, is usually the factor most employers miss and is the factor which the IRS’s definition doesn’t include.
In addition to looking at behavior control and financial control, Courts will also examine the nature of the relationship between the employer and the worker. A few case examples should illustrate the distinctions Courts make when determining which workers are independent contractors and which are employees. In Santa Cruz Transportation Inc. v. Unemp. Ins. Appeals Bd (1991), a Court of Appeals affirmed that workers had to willingly become independent contractors. A taxicab company attempted to have its employees sign contracts making them work under the title of independent contractors.
The workers, however, were not independent as there was no distinction between their previous status as employees and their post-contract status as independent contractors. Santa Cruz Transportation gives us two lessons, beyond the fact that there are real differences between employees and independent contractors. First, workers must understand that they are independent contractors and cannot be forced or tricked into such a status. Second, as the Santa Cruz Transportation Court wrote: “…attempts to conceal employment by formal documents purporting to create other relationships have led the courts to disregard such terms whenever the acts and declarations of the parties are inconsistent.” In other words, just because a contract or other piece of former paperwork declares a worker to be an independent contractor, does not make it so. The relationship between the employer and the worker must be an honest one, with both sides understanding the worker’s status, before the worker can be legitimately declared an independent contractor.
The next two cases further demonstrate that behavioral and financial controls are not the only factors Courts may take into consideration when differencing independent contractors from employees. In both Air Couriers Int’l v. EDD (2007), Air Couriers Int’l is a package delivery companies which classified their package delivery driver employees as independent contractors. Air Courier’s provided significant autonomy to their drivers: the drivers could work as long as they wanted, choose their own delivery routes, used and paid for their own vehicles and gas, were not required to wear company uniforms, and their employers paid them by the job.
Nevertheless, the Court found that the drivers were employees rather then independent contractors. First, the right of control test, as the Courts saw it, means little if the job is so simple that supervision is not required. Likewise, the test might not work well if an employee has tremendous amount of experience with his or her job. Second, like Santa Cruz Transportation, many of Air Courier’s drivers were unaware that they were listed as independent contractors, even though the same drivers had signed contracts stating that they were contractors rather then employees. Finally, and more importantly, many of the drivers had worked for the company for many years. Air Couriers Int’l reveals that the length of the relationship between the employer and the worker make affect how a Court will perceive the relationship. The longer the employment, the more likely a Court make declare an independent contractor to be an employee.
The case JKH Enterprises v. Department of Industrial Relations (2006) will provide one more dynamic in an employer/independent contractor relationship. JKH Enterprise, like Air Couriers Int’l, is a package delivery service company. JKH Enterprise also gave its driver’s significant self-direction. And also like Air Couriers Int’l, the Court for the case rejected JKH Enterprise’s argument that its employees were independent contractors. Instead, the Court found that the basis of the driver’s work, delivering packages for the company, was “the integral heart of JKH’s courier service business”. In other words, the work JKH Enterprise’s drivers performed were an essential and necessary part of the company’s success. The so-called independent contractor drivers didn’t just help JKH Enterprise in its day to day operations; the drivers were, for all intents and purposes, the reason JKH Enterprise functioned at all. Independent contractors are supposed to be extra help or extra advice to a business, not the sole reason for that company’s success.
In conclusion, we can see that there are many factors in separating employees from independent contractors. The most significant one is that of control: independent contractors have more power over their work then their fully employed counterparts. In California, however, the right of control test is not the only factor in determining which worker is an independent contractor and which worker is an employee. Both JKH Enterprise and Air Couriers Int’l lost their cases partly because they relied too much on the right of control test. Employers looking to strengthen their case or workers looking for reclassification of their employment status should consider, in addition to the right of control test, the relationship between the worker and the employer. Courts in California will judge the relationship by its honesty, its length, and its importance to the company’s success.
Whether you are an employer, employee or independent contractor, if you have questions or need additional information about employees vs. independent contractors, please contact Berkeley-Oakland-Walnut Creek business attorney Richard Korb at (510) 524-0903 for a free consultation.
[1] RICHARD E. KORBis a seasoned attorney with 30 years of business, real estate, litigation and transactional experience. Over his legal career, Richard has successfully litigated and resolved over 300 court cases in the fields of contract law, real estate, employment, unfair competition, and general civil law and he has drafted and negotiated over 200 contracts and licenses for large and small companies alike. Richard leverages his experience as a former partner in a 100-person law firm and chief counsel for a public software company to assist individuals and companies, from start-ups to multi-nationals, with a broad spectrum of legal matters. In addition to his legal practice, Richard is a court-approved mediator and serves on the Alternative Dispute Resolution (ADR) panel for both the Alameda and Contra Costs County Superior Courts. The content in this article and on the website or blog where it is posted is for informational purposes only. It is not intended to serve as legal advice and no attorney-client relationship shall exist by virtue of its dissemination. Should you wish legal advice, you may contact Richard for a consultation at 510-524-0903. ©Richard Korb. 2011.
RSS
Facebook
LinkedIn
YouTube
28 comments
Pete Akmal says:
August 6, 2011 at 7:27 am (UTC 0)
Awesome website! All the best to you.
Keith Mccauley says:
August 26, 2011 at 8:43 am (UTC 0)
Keep functioning ,fantastic job!
you are looking for the says:
September 1, 2011 at 7:00 pm (UTC 0)
Hello.This article was really remarkable, especially because I was investigating for thoughts on this issue last Friday.
daniele donato naked says:
September 2, 2011 at 7:12 pm (UTC 0)
This is great! Where do you find this stuff?
diablo 3 trailer says:
September 6, 2011 at 1:27 pm (UTC 0)
Greetings! Quite valuable suggestions on this informative article! It’s the small modifications that make the greatest adjustments. Many thanks a great deal for sharing!
software unlock iphone 4 says:
September 8, 2011 at 1:39 pm (UTC 0)
Nice site, thanks. I really love it.
Zubari Beograd says:
September 26, 2011 at 2:35 pm (UTC 0)
Hello.This post was extremely motivating, especially because I was browsing for thoughts on this topic last Wednesday.
alex cross series ebook download free says:
September 27, 2011 at 2:54 am (UTC 0)
Keep functioning ,splendid job!
Customer Reviews says:
September 27, 2011 at 4:47 am (UTC 0)
Very efficiently written article. It will be supportive to anyone who employess it, including myself. Keep doing what you are doing – looking forward to more posts.
costa 580p vs 580g says:
September 30, 2011 at 2:59 am (UTC 0)
I signed to your blog RSS. Will you post more on the topic?
Ticket giveaway contest ideas says:
September 30, 2011 at 4:48 am (UTC 0)
Nice post, thanks. I just signed up to your blog rss feed.
Golf Hotels in Algarve says:
October 1, 2011 at 4:55 pm (UTC 0)
Excellent post this will really help me.
3M Pocket Projector Review says:
October 2, 2011 at 2:17 am (UTC 0)
Hello.This post was extremely remarkable, especially because I was looking for thoughts on this issue last Tuesday.
Garden Bird Feeders says:
October 2, 2011 at 4:47 am (UTC 0)
Excellent blog, but it would be better if in future you can share more about this topic. Keep rocking.
Fitness Workout DVDs says:
October 4, 2011 at 6:38 am (UTC 0)
Hello.This post was extremely motivating, especially because I was looking for thoughts on this issue last week.
Igre Igre says:
October 14, 2011 at 4:33 am (UTC 0)
I admire your blog , it has of lot of information. You just got one perennial visitor of this site.
Igrice Besplatne says:
October 14, 2011 at 3:27 pm (UTC 0)
When I found your site was like wow. Thanks for putting your effort in writing this blog.
unlock iphone 4g says:
October 16, 2011 at 12:39 am (UTC 0)
Well I sincerely enjoyed reading it. This information procured by you is very effective for proper planning.
Online Igre says:
October 17, 2011 at 6:58 am (UTC 0)
Very good written article. It will be helpful to anybody who usess it, including yours truly
. Keep doing what you are doing – for sure i will check out more posts.
Translate Pdf Files says:
October 17, 2011 at 1:50 pm (UTC 0)
Good article, thank you. I signed up to your blog rss feed.
Tadalafil says:
October 17, 2011 at 11:45 pm (UTC 0)
alloha
buy viagra usa online pharmacy says:
October 20, 2011 at 9:02 am (UTC 0)
Nice extensive strategies in this article.I’d want to advise examining for instance something like hamburger. What’s your opinion?
how to unlock your phone says:
October 20, 2011 at 11:45 am (UTC 0)
One thing I would like to touch upon is that weight loss program fast can be performed by the right diet and exercise. Your size not merely affects appearance, but also the actual quality of life. Self-esteem, depressive disorder, health risks, as well as physical capabilities are impacted in extra weight. It is possible to make everything right but still gain. In such a circumstance, a medical problem may be the primary cause. While excessive food but not enough body exercise are usually at fault, common medical conditions and widely used prescriptions can easily greatly amplify size. Thanks alot : ) for your post right here.
Generic Viagra says:
October 20, 2011 at 6:16 pm (UTC 0)
We’re having a little bit predicament I are not able to manage to turn out to be in the position to support the feed, I’m using the services of yahoo person who reads mind you wherein.
generic cialis downloadable says:
October 21, 2011 at 5:59 am (UTC 0)
I thought this was a terrific check out i certainly comprehend at which you are coming from within the next sentence or two. Good document, I’ll most definitely check the various web content.
Generic Viagra says:
October 29, 2011 at 10:38 am (UTC 0)
Photograph examinating through most of you coupled with it’s very wonderful gadgets. For certain i will certainly bookmark your blog.
Generic Viagra says:
October 30, 2011 at 1:07 pm (UTC 0)
I’m oftentimes to make sure you operating a blog and that i really many thanks for website content. Your article has truly peaks excellent fascination. I am going to save your web blog and also always maintain reading for first time specifics.
cheapest viagra buy generic says:
November 1, 2011 at 3:51 am (UTC 0)
I’m all over this this particular write-up, I just guess this page prefers a whole lot more consideration. I’ll more likely yet again to understand more, thanks for who information.