Many times employers improperly classify their employees as independent contractors so they, the employers, 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.
Moreover, employers do not have to cover independent contractors under workers’ compensation insurance, and are not liable for payments for unemployment insurance, disability insurance, or social security.
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 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 contract. Labor Code Section 2750.5.
Since there is no set definition of the term “independent contractor”, you must look to the interpretations of the courts and enforcement agencies to decide if in a particular situation a worker is an employee or an independent contractor.
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, one must apply the “economic realities” test adopted by the California Supreme Court.
In applying this test, the most significant factor to be considered is whether the person to whom service is rendered, such as 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.
Other additional factors may also be considered, such as:
- 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 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 concerned, 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; and
- Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but it is not determinative, since this is a question of law based on objective tests.
- REMEMBER:*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.*A person may file a wage claim with the Division of Labor Standards Enforcement, or file an action in court to recover lost overtime and other potential damages, if the employer acts inappropriately. After the claim is completed and filed with the DLSE, it is assigned to a deputy labor commissioner who will determine how best to proceed. Initial action taken regarding a claim can be referred to a conference or hearing, or even dismissed. At the hearing, parties and witnesses testify under oath and the proceeding is recorded. Subsequently a decision or award by the labor commissioner will be served on the parties. Either party may appeal the award to a civil court of competent jurisdiction. The court will set the matter for trial and each party will have the opportunity to present evidence and witnesses. The evidence and testimony presented at the commissioners’ hearing, however, will not be the basis for the court’s decision.*However, if it is found that you are in fact an independent contractor, the Division of Labor Standards Enforcement cannot assist you, as it does not have jurisdiction over independent contractors. In this instance you would have to go to court to try to enforce your rights.
- Finally, if you are an employee and your employer discriminates or retaliates against you in any manner whatsoever, such as a discharge because you questioned him about your employment status, or about not being paid overtime or because you filed a claim with the labor commissioner, you may file a discrimination and retaliation complaint with the labor commissioner’s office. In the alternative, you can file an action in court against your employer. *Moreover, even if the written agreement exists, courts will look behind such an agreement in order to examine the facts that characterize the parties’ actual relationship, and make a determination as to employment status based upon the analysis of such facts and the application of law.
- The fact that a person who provides services is paid as an independent contractor, without payroll deductions and without income reported by an IRS form 1099 rather than a W2, is of no significance whatsoever in determining employment status.
- Other factors to consider in determining whether a worker is an employee or independent contractor are the existence of a written agreement purporting to establish an independent contractor relationship and the fact that a worker is issued a 1099 form rather than a W-2. Again, however, these factors nevertheless are not solely determinative with respect to the status of the worker.