Independent Contractor

Potential Liability of Independent Contractors

Independent contractors are not employees.  An employer need not pay for their benefits or insurance and is not required to withhold taxes from their pay checks.  Unfortunately, an independent contractor that should have been classified as an employee carries hidden costs in the form of unpaid wages and penalties.  Even properly classified independent contractors can still create liability for a business.

The IRS did a study in which it found that millions of U.S. workers were misclassified as independent contractors.  (Report of Treasury Inspector General for Tax Administration (June 14, 2013) Reference Number: 2013-30-058: “Employers Do Not Always Follow Internal Revenue Service Worker Determination Rulings”.)  The IRS and other federal and state agencies are much more carefully looking into potential misclassification now than in the past.  If an employer has a doubt about whether an independent contractor might actually be an employee, it should take the time and effort to investigate the legal issue.  Reviewing the independent contractor relationships is not always easy, in part, because each federal and state agency may have a slightly different list of factors it uses to determine which workers are independent contractors.  Please see my past article: Independent Contractor: Stepped Up Enforcement (May 2015).

When entering into independent contractor relationships, businesses can draft agreements that will help to protect them.  Agreements are not full proof, because the agencies and suing attorneys will look at what the worker does, not what the agreement says.  However, a tightly worded agreement can help.  For instance, an agreement should never use the term “at-will” when referring to the status of an independent contractor.  Only employees are “at-will”.  Simply describe the parameters of the tasks the worker must perform.  Also, avoid non-compete clauses.  That type of control normally is for employees who perform the core functions of the employer’s business.  In most cases, independent contractors have their own businesses that are not directly related to the business for which they work.  Think of outside lawyers, accountants, consultants, and other types of professionals.  If the worker potentially will compete with the business after leaving the company, they were probably employees.

Even properly classified independent contractors can create liability headaches for a business.  When a properly designated independent contractor harasses a protected employee, the business can be liable for those acts.  That is true of other discriminatory conduct too.  Sometimes independent contractors get hurt at job sites.  When that happens, they are not covered by Workers’ Compensation insurance.  If the business arguably caused the injury through negligence or another theory, the injured contractor may sue.

Often, independent contractors are cheaper and less headache than an employee, but the downside can be very steep if the designated worker is not really and independent contractor.  However, even a properly designated independent contractor can create liability for a business.

Independent Contractor

Independent Contractor or Employee?

Am I an independent contractor or an employee?  How should my business classify its workers, as independent contractors or employees?

Both workers and businesses struggle with these questions at times.  Most of the time, the answers are pretty clear.  However, in a significant minority of employment relationships, the answers are not clear.  Unfortunately for those who struggle with questions about their employment relationships, the tests used to answer these questions are often hard to apply.

The first thing to consider when trying to determine whether a worker is an employee or independent contractor is whether the person receiving the service controls the details of the work.  (Empire State Mines Co. v. Cal. Emp. Com., (1946) 28 Cal.2d 33, 43.)  However, control is not the only consideration.  “[T]he ‘control’ test, applied rigidly and in isolation, is often of little use in evaluating the infinite variety of service arrangements.”  (Borello & Sons, Inc. v. Dept. of Industrial Relations, (1989) 48 Cal.3d 341, 350.)  In other words, if control does not clearly show an employment relationship, then the person analyzing the relationship should apply “economic reality test” factors, similar to those listed below, to further evaluate the relationship:

(a) Whether the one performing services is engaged in a distinct occupation or business;

(b) 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;

(c) The skill required in the particular occupation;

(d) Whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;

(e) The length of time for which the services are to be performed;

(f) The method of payment, whether by the time or by the job;

(g) Whether or not the work is a part of the regular business of the principal;

(h) Whether or not the parties believe they are creating the relationship of employer-employee.

(i) The worker’s opportunity for profit or loss depending on managerial skill;

(j) The permanence of the working relationship;

(k) Whether the service rendered is an integral part of the employer’s business.  (Borello, at 351, 354-355.)

Employers have argued that in some situations, only the control test should be applied.  That test arguably will more often find an independent contractor relationship than the economic realities test.  Employers usually want to have independent contractors working for them rather than employees.  However, the trend is to find an employment relationship, at least where employee rights and benefits are concerned or where the state has an enforcement interest.  (Air Couriers Internat. v. Employment Development Dept., (2007)150 Cal.App.4th 923, 935-37.)

The federal cases analyzing employer-employee relationships under the Fair Labor Standards Act also apply economic realities test factors.  (Real v. Driscoll Strawberry Associates, (9th Cir. 1979) 603 F.2d 748, 754.)  Regardless, some state or federal agencies may still apply some form of the control test.

As an employer, to be on the safe side, you should analyze your workers under the arguably more liberal economic realities test.  Similarly, in most cases, workers will not be wrong if they analyze their work relationship by applying the broader economic realities test.  However, depending on what agency is analyzing the issue or the state in which the worker is performing the work, a control test may be the correct test to apply.

S. Ward Heinrichs, Esq.
Attorneys at Law
A Professional Corporation
4565 Ruffner Street, Suite 207
San Diego, CA 92111
(858) 292-0792
(858) 408-7543 (fax)