Correctly classifying someone as an independent contractor, as opposed to an employee, is very important. An employer in California must comply with both California employment laws and the federal Fair Labor Standards Act (FLSA) for its employees. But a business that hires an independent contractor is not bound by many of these laws. California and the federal government have separate but similar tests for whether a worker will be considered an employee or an independent contractor. It is important to note that a court or agency scrutinizing a relationship between a worker and a business or organization will not simply accept the classification put forth by the business or organization. In other words, just because the relationship is based on an “Independent Contractor Agreement” does not mean that a court would accept that classification. In California, the federal government and the California Labor and Workforce Development Agency have entered into an agreement to coordinate enforcement of employment laws where misclassifications occur.
Another reason why correct classification is very important is because under both the California and federal tests, an officer of a corporation could be held personally liable for noncompliance with employment laws despite the fact that the individual would generally enjoy limited liability through the corporate form. This is because an individual or an entity may be deemed an “employer” under these tests.
Under the federal test, the main consideration in determining whether an employment relationship is present is the amount of control and supervision over the person doing the work – the more control, the more likely that an employment relationship exists. A person or entity may be deemed an “employer” depending on: (1) the ability to hire and fire workers, (2) the level of supervision and control over work schedules or conditions of employment, (3) whether the worker is paid at fixed rates and how the worker is paid, and (4) the level of maintenance of employment records. In looking at whether a worker is an employee or an independent contractor, the following factors are considered (with an overall eye towards the level of control and supervision of the work):
California uses a multi-factor “economic realities” test, which also focuses on the level of control over the worker. The factors examined in California may include:
The employee vs. independent contractor inquiry is done on a case-by-case basis. Businesses and organizations taking on workers should exercise caution in approaching these relationships. A good rule of thumb is that a business or organization can dictate the final product of an independent contractor but should not direct the means by which the product is produced. Of particular importance are the contractor’s ability to set his or her own schedule, project-based instead of hourly payment, and the use of the contractor’s own equipment, knowledge, and training in performing the task.
(See IRS Publication 15-A for a further discussion and industry-specific examples of the distinction between independent contractors and employees.)
This article was contributed by our friends at Elevate Law and Strategy. Contact them to discuss these factors to help you decide if an employee or independent contract is best for your needs.