Exercise Caution when Hiring

Many businesses hire workers as “independent contractors,” rather than as “employees.” Doing so may help a business avoid time, expense and legal obligations. The person hired may also prefer such an arrangement. The problem is that the label “independent contractor” is not always recognized in law–even where the parties have a written agreement to that effect.

Misclassifying an employee as an “independent contractor” can have dire (read “expensive”) consequences. California Labor Code Section 226.8 imposes penalties of $5,000-$15,000 for a “willful” violation of the law. If this is found to be a “pattern or practice,” penalties of $10,000-$25,000 can be added on. Despite this, mis-classifications happen every day, in no small part because of confusion regarding who is and is not an “independent contractor.” While the entire body of law related to this topic would (and does) fill volumes, there are a few basic principles that may be helpful to an employer.

Historically, a person could be classified as an independent contractor unless the employer had the “right to control” the manner in which he or she did their work. Employers could avoid legal responsibility for workers who had a certain level of independence in their work. However, the law has evolved over the last 50 years. Courts have found that an employment relationship existed in many situations where the employer had no right to control the manner in which the work is performed.

There are many factors which the courts and government agencies consider when determining whether someone is an independent contractor. They are too numerous to list here and have no meaning unless they are analyzed in the context of a specific business. However, the most important factors involve the degree of control and what the courts frequently refer to as the “economic realities.” Is a person’s job an integral part of the business? Is that person dependent on the business for their livelihood? If so, it is more than likely that he or she is an employee. On the other hand, someone who provides the same type of service to other businesses, and holds a license for the type of work done is more likely to be an independent contractor.

California is highly regulated in terms of wage and hour practices and there are a host of violations which an employer may unknowingly commit by misclassifying an employee as an independent contractor. A business faced with a mis-classification claim can be liable for overtime wages, which can be sizable, even where the employee was not highly paid. And that is just the beginning.   An employer who is found to have committed certain violations faces all kinds of penalties. On top of that, a successful plaintiff can force the employer to pay his or her attorney’s fees. The employee can also sue for the violation of other employees’ rights.

As if all that isn’t scary enough, there’s more. Employers are responsible for withholding wages for payment to the Franchise Tax Board, the Employment Development Department and the Internal Revenue Service. Any one of these agencies can also prosecute a business for the failure to withhold money for their benefit. If they decide that an employee is improperly classified they can recover the money that was not withheld, even though it was paid to the employee. They can also recover civil penalties.

The Department of Industrial Relations can prosecute a business for failure to provide workers’ compensation insurance. There is a presumption of negligence when there is no workers’ compensation insurance to cover an injured employee, so the exposure is enormous if an employee is injured.

Given the potential liabilities associated with hiring independent contractors, one might wonder why any business would do it. The reason is that there are situations in which it is entirely appropriate and it would be a waste of time and money to assume all of the responsibilities associated with hiring them as employees. Deciding whether to classify someone as an “employee” or “independent contractor” should not be done lightly and certainly is more complicated than merely attaching a label. In most cases it should not be done without sound legal advice by an experienced employment attorney, because misclassifying someone as an independent contractor can have serious (and hence expensive) consequences. Because there is no “one size fits all” solution, an employer is well advised to seek competent legal counsel in order to minimize exposure to a costly claim.