Independent Contractors

Under California law, people such as lawyers, contractors, subcontractors and auctioneers who follow an independent trade, business, or profession in which they offer their services to the public, are generally not employees. However, whether such people are employees or independent contractors depends on the facts in each case.

The general rule is that an individual is an independent contractor if the employer has the right to control or direct only the result of the work and not the means and methods of accomplishing the result.

Example: Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. She is to receive $1,280 every 2 weeks for the next 10 weeks. This is not considered payment by the hour. Even if she works more or less than 400 hours to complete the work, Vera Elm will receive $6,400. She also performs additional electrical installations under contracts with other companies that she obtained through advertisements. Vera is an independent contractor.

Employee

Under common–law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.

Example: Donna Lee is a salesperson employed on a full–time basis by Bob Blue, an auto dealer. She works 6 days a week, and is on duty in Bob's showroom on certain assigned days and times. She appraises trade–ins, but her appraisals are subject to the sales manager's approval. Lists of prospective customers belong to the dealer. She has to develop leads and report results to the sales manager. Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. She is paid a commission and is eligible for prizes and bonuses offered by Bob. Bob also pays the cost of health insurance and group–term life insurance for Donna. Donna is an employee of Bob Blue.

Common Law Rules

Facts that provide evidence of the degree of control and independence fall into three categories:

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

Under the new tax law, more and more people may want to be classified as independent contractors in order to take advantage of the "pass through" deduction.

 However, the cost of misclassification of an employee is extremely high for an employer. The employer will be potentially liable for overtime, meal and rest periods, labor code penalties of up to $25,000 per employee, and tax penalties.

The emerging trend by the Courts, Labor Commissioner, IRS and EDD is to find the individual to be an employee. When in doubt, the individual will be found to be an employee. Now, under the new State Supreme Court in Dynamex, just about everyone will be determined to be an employee.

THE ABC TEST

Recently, the California State Supreme Court issued its landmark decision in Dynamex, where they set forth a 3 part test which is much broader than the right of control test. Now, just about everyone will be found to be an employee, unless they are coming to perform a one shot project that has nothing to do with the main purpose of the business, such as a plumber, painter, electrician or a computer installer.

Contact Us

If you believe that you have been misclassified as an independent contractor, when in fact, you are an employee, you may be entitled to overtime pay, meal and rest breaks, labor code penalties and other benefits, feel free to contact this office now at (310) 274-8216. We will fight for your rights.