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Independent
contractor versus employee
Not all workers
are employees as they may be volunteers or independent contractors.
Employers oftentimes improperly classify their employees as
independent contractors so that they, the employer, do not have
to pay payroll taxes, the minimum wage or overtime, comply with
other wage and hour law requirements such as providing meal
periods and rest breaks, or reimburse their workers for business
expenses incurred in performing their jobs. Additionally, employers
do not have to cover independent contractors under workers’
compensation insurance, and are not liable for payments under
unemployment insurance, disability insurance, or social security.
The state agencies most
involved with the determination of independent contractor status
are the Employment Development Department (EDD), which is concerned
with employment-related taxes, and the Division of Labor Standards
Enforcement (DLSE), which is concerned with whether the wage,
hour and workers’ compensation insurance laws apply. There are
other agencies, such as the Franchise Tax Board (FTB), Division
of Workers’ Compensation (DWC), and the Contractors State Licensing
Board (CSLB), that also have regulations or requirements concerning
independent contractors. Since different laws may be involved
in a particular situation such as a termination of employment,
it is possible that the same individual may be considered an
employee for purposes of one law and an independent contractor
under another law. Because the potential liabilities and penalties
are significant if an individual is treated as an independent
contractor and later found to be an employee, each working relationship
should be thoroughly researched and analyzed before it is established.
There is a rebuttable presumption
that where a worker performs services that require a license
pursuant to Business
and Professions Code Section 7000, et seq., or performs
services for a person who is required to obtain such a license,
the worker is an employee and not an independent contractor.
Labor
Code Section 2750.5
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Q-1.
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How
do I know if I am an employee or an independent contractor? |
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Ans.
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There
is no set definition of the term "independent contractor"
and as such, one must look to the interpretations of the
courts and enforcement agencies to decide if in a particular
situation a worker is an employee or independent contractor.
In handling a matter where employment status is an issue,
that is, employee or independent contractor, DLSE starts
with the presumption that the worker is an employee. Labor
Code Section 3357. This is a rebuttable presumption
however, and the actual determination of whether a worker
is an employee or independent contractor depends upon
a number of factors, all of which must be considered,
and none of which is controlling by itself. Consequently,
it is necessary to closely examine the facts of each service
relationship and then apply the law to those facts. For
most matters before the Division of Labor Standards Enforcement
(DLSE), depending on the remedial nature of the legislation
at issue, this means applying the "multi-factor" or the
"economic realities" test adopted by the California Supreme
Court in the case of S. G. Borello & Sons, Inc.
v Dept. of Industrial Relations (1989) 48 Cal.3d 341.
In applying the economic realities test, the most significant
factor to be considered is whether the person to whom
service is rendered (the employer or principal) has control
or the right to control the worker both as to the work
done and the manner and means in which it is performed.
Additional factors that may be considered depending on
the issue involved are: |
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Whether the person performing services is engaged
in an occupation or business distinct from that
of the principal;
Whether or not
the work is a part of the regular business of the
principal or alleged employer;
Whether the
principal or the worker supplies the instrumentalities,
tools, and the place for the person doing the work;
The alleged
employee’s investment in the equipment or materials
required by his or her task or his or her employment
of helpers;
Whether the
service rendered requires a special skill;
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;
The alleged
employee’s opportunity for profit or loss depending
on his or her managerial skill;
The length of
time for which the services are to be performed;
The degree of
permanence of the working relationship
The method of
payment, whether by time or by the job
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.
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Even where there is an
absence of control over 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)
Other points to
remember in determining whether a worker is an employee
or independent contractor are that the existence of
a written agreement purporting to establish an independent
contractor relationship is not determinative (Borello,
Id.at 349), and the fact that a worker is issued
a 1099 form rather than a W-2 form is also not determinative
with respect to independent contractor status. (Toyota
Motor Sales v. Superior Court (1990) 220 Cal.App.3d
864, 877)
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Q-2.
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The
person I work for tells me that I am an independent contractor
and not an employee. He does not make any payroll deductions
or withholdings for taxes, social security, etc., when
he pays me, and at the end of the year he provides me
with an IRS form 1099 rather than a W-2. By paying me
in this manner does it mean I am automatically an independent
contractor? |
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Ans.
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No.
The fact that a person who provides services is paid as
an independent contractor, that is, without payroll deductions
and with income reported by an IRS form 1099 rather than
a W-2, is of no significance whatsoever in determining
employment status. Your employer cannot change your status
from that of an employee to one of an independent contractor
by illegally requiring you to assume a burden that the
law imposes directly on the employer, that being, withholding
payroll taxes and reporting such withholdings to the taxing
authorities. |
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Q-3.
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Does
it make any difference if I am an employee rather than
an independent contractor? |
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Ans.
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Yes,
it does make a difference if you are an employee rather
than an independent contractor. California’s wage and
hour laws (e.g., minimum wage, overtime, meal periods
and rest breaks, etc.), and anti-discrimination and retaliation
laws protect employees, but not independent contractors.
Additionally, employees can go to state agencies such
as DLSE to seek enforcement of the law, whereas independent
contractors must go to court to settle their disputes
or enforce other rights under their contracts. |
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Q-4.
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When
I started my current job my employer had me sign an agreement
stating that I am an independent contractor and not an
employee. Does this mean I am an independent contractor? |
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Ans.
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No.
The existence of a written agreement purporting to establish
an independent contractor relationship is not determinative.
The Labor Commissioner and courts will look behind any
such agreement in order to examine the facts that characterize
the parties’ actual relationship and make their determination
as to employment status based upon their analysis of such
facts and application of the appropriate law. |
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Q-5.
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How
can it be that the Labor Commissioner determined I was
an employee with respect to a wage claim I filed and won,
and the Employment Development Department (EDD) determined
I was an independent contractor, and denied my claim for
unemployment insurance benefits? |
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Ans.
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There
is no set definition of the term "independent contractor"
for all purposes, and the issue of whether a worker is
an employee or independent contractor depends upon the
particular area of law to be applied. For example, in
a wage claim where employment status is an issue, DLSE
will often use the five-prong economic realities test
to decide the issue. However, in a separate matter before
a different state agency with the same parties and same
facts, and employment status again being an issue, that
agency may be required to use a different test, for example,
the "control test," which may result in a different determination.
Thus, it is possible that the same individual will be
considered an employee for purposes of one law and an
independent contractor under another. |
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Q-6.
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What
can I do if I believe my employer has misclassified me
as an independent contractor and as a result am not being
paid any overtime? |
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Ans.
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You
can either file
a wage claim with the Division of Labor Standards
Enforcement (the Labor Commissioner's Office), or you
can file an action in court to recover the lost overtime
premiums. In both situations, it will first be necessary
to determine your employment status, that is, employee
or independent contractor, before the issue of overtime
can be addressed and decided. Additionally, if it is determined
that you are an employee and you no longer work for this
employer, you can make a claim for the waiting time penalty
pursuant to Labor
Code Section 203. Eligibility for this penalty
is dependent upon your employment status, as independent
contractors are ineligible for the waiting time penalty. |
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Q-7.
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What
is the procedure that is followed after I file a wage
claim? |
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Ans.
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After your claim is completed
and filed with a local office of the Division of Labor
Standards Enforcement (DLSE), it will be assigned to
a Deputy Labor Commissioner who will determine, based
upon the circumstances of the claim and information
presented, how best to proceed. Initial action taken
regarding the claim can be referral to a conference
or hearing, or dismissal of the claim.
If the decision
is to hold a conference, the parties will be notified
by mail of the date, time and place of the conference.
The purpose of the conference is to determine the validity
of the claim, and to see if the matter can be resolved
without a hearing. If the claim is not resolved at the
conference, the next step usually is to refer the matter
to a hearing or dismiss it for lack of evidence.
At the hearing the
parties and witnesses testify under oath, and the proceeding
is recorded. After the hearing, an Order, Decision,
or Award (ODA) of the Labor Commissioner will be served
on the parties.
Either party may
appeal the ODA to a civil court of competent jurisdiction.
The court will set the matter for trial, with each party
having the opportunity to present evidence and witnesses.
The evidence and testimony presented at the Labor Commissioner’s
hearing will not be the basis for the court’s decision.
In the case of an appeal by the employer, DLSE may represent
an employee who is financially unable to afford counsel
in the court proceeding.
See the Policies
and Procedures of Wage Claim Processing pamphlet
for more detail on the wage claim process procedure.
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Q-8.
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What
can I do if I prevail at the hearing and the employer
doesn’t pay or appeal the Order, Decision, or Award? |
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Ans.
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When
the Order, Decision, or Award (ODA) is in the employee's
favor and there is no appeal, and the employer does not
pay the ODA, the Division of Labor Standards Enforcement
(DLSE) will have the court enter the ODA as a judgment
against the employer. This judgment has the same force
and effect as any other money judgment entered by the
court. Consequently, you may either try to collect the
judgment yourself or you can assign it to DLSE. |
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Q-9.
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What
can I do if my employer retaliates against me because
I thought I was misclassified as an independent contractor
and objected to not being paid overtime? |
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Ans.
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If
you are an employee and your employer discriminates or
retaliates against you in any manner whatsoever, for example,
he discharges you because you question him about your
employment status, or about not being paid overtime, or
because you file a claim or threaten to file a claim with
the Labor Commissioner, you can file
a discrimination/retaliation complaint with the Labor
Commissioner’s Office. In the alternative, you can file
an action in court against your employer. If, on the other
hand it is determined that you are in fact an independent
contractor, DLSE cannot assist you as it does not have
jurisdiction over independent contractors, and you would
have to go to court to enforce your rights. |
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