Avoiding Misclassification of Hired Workers in California

For possible cost savings and ease in administration, businesses are sometimes tempted to classify people working regularly as “independent contractors” instead of “employee.” In California, as in other states, independent contractors are usually not entitled to most of the benefits that employer must provide employees, including minimum wage, overtime pay, workers’ compensation coverage, social security credits, and unemployment insurance.However, whether inadvertent or otherwise, a company’s misclassification of one or more hired persons as independent contractors instead of employees can become a very expensive error. The California Employment Development Department (EDD), Franchise Tax Board (FTB), Division of Labor Standards Enforcement (DLSE), and Department of Industrial Relations (DIR), as well as the federal Internal Revenue Service are all agencies with the power to investigate, audit and impose expensive penalties on businesses for incorrect employee or independent contractor designations.Such errors also can also create liabilities for back wages, overtime compensation, and payments to the government for retroactive unemployment, workers’ compensation and social security coverage.Analysis must always be on a case-by-case basis. Agencies commonly judge classification decisions on the greater weight of factors favoring employment or independent contractor status. For example, the DLSE publishes a list of pertinent qualities for validly classified independent contractors:

• An independent contractor’s occupation is distinctly different from the product of the hiring company (e.g., a manufacturing company hires an outside lawyer to write represent the business in court);
• An independent contractor’s work is not part of the regular business of the hiring entity (an auto dealer retains a marketing consultant to analyze purchasing trends);
• An independent contractor commonly provides his or her own tools and workspace and covers his/her overhead expenses;
• An independent contractor usually provides a specialized service or skill (e.g,., a professional accountant delivering financial services under his/her distinct license);
• An independent contractor’s work is usually unsupervised and the hiring company lacks the right to control (i.e., micro-manage or supervise) the course of that contractor’s labors;
• The length of time for an independent contractor’s services are classically short-term, project by project; and
• The method of payment for an independent contractor’s services is usually by the job, not by the hour or other period of time.

There are always exceptions to these factors. Lawyers commonly charge by the hour. A business might provide the contractor a workspace on company’s premises to carry out the project. Again, proper classification depends on a thorough and accurate assessment of all independent vs. employment factors. An experienced labor lawyer can be a significant help in the process, including the appropriate contract documentation.