INDEPENDENT CONTRACTORS

Is the person performing work for you an ‘independent contractor’ or are they an employee? The answer to that question can have tremendous financial consequences–tens of thousands of dollars in fines and penalties–if they are found to be your employee. This is something our employment lawyers in Fresno know very well.

Individuals who are “independent contractors” are not considered employees for wage and hour purposes. The state agencies most involved with the determination of the 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) and the Contractors State Licensing Board (CSLB), which also have regulations or requirements concerning independent contractors. Since different laws are involved, it is possible that the same individual will be considered an employee for purposes of one law and an independent contractor under another law.

Various agencies and courts use different factors to determine employment status, and these factors can sometimes conflict. Because the potential liabilities and penalties are significant if an individual is treated as an independent contractor and later found to be an employee, it is advisable that each such relationship be thoroughly researched before being implemented.

There is no single definitive factor in determining whether an individual is an independent contractor or an employee for purposes of wage and hour laws. No single factor determines whether a worker is an employee or independent contractor; multiple factors are considered in a comprehensive analysis.

An individual will be considered an employee where the employer exercises all necessary control by direct or indirect means over the work details of the individual. (S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989 48 Cal.3d 341). In addition, the following factors are to be considered in determining an individual’s status as an independent contractor:

1. The individual performs services in an occupation or business distinct from that of the principal;
2. The work performed is not part of the regular business of the principal;
3. The individual supplies his/her own instrumentalities, tools and the work place; independent contractors often provide their own tools and equipment.
4. The individual has made a significant investment in the equipment or materials required for his or her task(s);
5. The individual’s services require a unique skill in a particular occupation;
6. The individual’s occupation in the locality is usually done by a specialist without supervision;
7. The individual’s opportunity for profit or loss depends on his/her own managerial skill;
8. The time for which the services are to be performed is reasonably limited to the task(s) for which the individual was hired;
9. The working relationship between the individual and the employer is reflective of the time allotted to perform the task(s) for which the individual was hired;
10. The method of payment is time certain or project specific; the contract specifies payment terms, including how and when payment for completed work is made.
11. The parties do not believe they are creating an employer-employee relationship. (Borello, Id. at 350) Independent contractors (rev. 1/2011) 2
12. The individual has the right to control and discretion as to the manner of performance of the contract for services but not the means by which the work is accomplished; (Labor Code Section 2750.5)
13. The individual is customarily engaged in an independently established business; (Labor Code Section 2750.5)
14. The individual’s independent contractor status is bona fide and not a subterfuge to avoid employee status; (Labor Code Section 2750.5)
15. The individual has a substantial investment in the business other than personal services; (Labor Code Section 2750.5)
16. The individual holds him/herself out to be in business for him/herself; (Labor Code Section 2750.5)
17. The individual bargains for a contract to complete a specific project for compensation by project rather than by time; (Labor Code Section 2750.5)
18. The individual has control over the time and place the work is performed; (Labor Code Section 2750.5)
19. The individual hires his/her own employees; (Labor Code Section 2750.5)
20. The individual holds a license to perform the work; (Labor Code Section 2750.5)
21. The relationship is not severable or terminable at will by the principal but gives rise to an action for breach of contract. (Labor Code Section 2750.5)

The evaluation is not based on a single factor, but rather on the totality of circumstances, and both common law and statutory tests require consideration of multiple factors. Different factors may be weighed depending on the specific agency or court involved.

It is important to have a written contract or independent contractor agreement, which should include a clear project description, payment terms, and specify the rights and obligations of both parties. This helps prevent misclassification and clarifies the scope of work and expectations.

Even where there is an absence of control over the details, an employer-employee relationship will be found if the principal retains pervasive control over the operation of the whole, the worker’s duties are an integral part of the operation, and the nature of the work makes detailed control unnecessary. (Yellow Cab Cooperative v. Workers Compensation Appeals Board (1991) 226 Cal.App.3d 1288)

In addition, the existence of a written agreement purporting to establish an independent contractor relationship is not determinative. Simply having an agreement stating the worker is an independent contractor does not determine employment status. (Borello, Id. at 349)

Nor is the fact that a worker is issued a 1099 form rather than a W-2 form determinative with respect to independent contractor status. (Toyota Motor Sales v. Superior Court (1990) 220 Cal.App.3d 864, 877.)

There is a rebuttable presumption that where a worker performs services that require a license pursuant to Business and Professions Code § 7000, et seq., or who 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 § 2750.5). The employment relationship is determined by legal standards, not just by what the employer calls the worker.

Whether the work is of the same nature as the worker’s established trade or business is also a relevant factor in determining independent contractor status.

Independent contractors often set their own working hours, provide their own tools, and act as their own boss, reflecting their independence and autonomy.

Independent contractors can work with other clients and other businesses, and may have a long term contract with one client while still maintaining their independence.

If a client fails to meet their payment obligations, the independent contractor has the right to seek legal remedies.

Independent contractors do not receive typical employee benefits and must arrange their own health and disability insurance.

Independent contractors are responsible for paying their own payroll taxes, including social security contributions.

Understanding independent contractor rights and proper classification can help contractors earn more money and avoid costly disputes.

Call TOMASSIAN, PIMENTEL & SHAPAZIAN at 559-277-7300 and ask for Paul Pimentel if you have any questions about these issues.

Introduction to Employment Status

Understanding your employment status is crucial for protecting your interests and ensuring you’re in compliance with the law, whether you’re an employer or worker. The classification between employee and independent contractor isn’t just paperwork—it directly affects your access to essential benefits like health insurance, pension plans, and paid leave, as well as who’s responsible for handling employment taxes and Medicare taxes.

In today’s rapidly evolving gig economy, where independent contractors are becoming increasingly common, knowing exactly where you stand is more important than ever before. If you’re classified as an independent contractor, you won’t receive typical employee benefits and you’ll need to handle your own tax obligations, including self-employment and Medicare taxes—a responsibility that can catch many workers off guard.

This classification also determines your access to crucial legal protections and your ability to claim specific workplace rights that employees take for granted. Whether you’re navigating the modern workforce as an employee or an independent contractor, understanding your status is the essential first step in safeguarding your interests and staying on the right side of employment law.

Determining Employment Status

Figuring out whether someone is an employee or an independent contractor requires you to carefully look at the actual working relationship between the hiring company and the worker. You can’t just rely on job titles or what’s written in contracts – what really matters is how things actually work day-to-day.

The Fair Labor Standards Act (FLSA) gives you guidance by focusing on the economic reality of the relationship, and understanding this can help you avoid costly mistakes. Key factors you need to consider include how much control the employer has over the worker, whether the worker can make their own business decisions, and if the worker is free to take on multiple clients or projects.

For example, if you’re dealing with a worker who sets their own rates, negotiates their own contract terms, and works with several different clients, you’re probably looking at an independent contractor situation.

On the flip side, if the employer is calling the shots on work schedules, closely supervising the work, and the worker is economically dependent on just that one employer, you’re likely dealing with an employee classification. Getting employment status right is critical for staying compliant with labor laws and avoiding expensive legal disputes that can hurt your business.

Worker Classification

Worker classification is the process you’ll need to navigate when deciding whether someone working for you should be treated as an employee or an independent contractor. If you’re dealing with this decision, understand that it carries significant legal and financial consequences that can affect everything from employment taxes to overtime pay, minimum wage requirements, and employee benefits.

As an employer, you must ensure that your workers are properly classified if you want to stay compliant with both state and federal regulations. Getting this wrong can result in serious penalties when you fail to pay employment taxes or provide the employee benefits that are required by law. In some states, you’ll encounter the ABC test when determining worker status.

Under this test, any worker you hire is presumed to be an employee unless you can clearly demonstrate that the worker operates free from your control, performs work that falls outside the usual course of your business operations, and maintains their own independently established trade or business.

If you’re working as an independent contractor, proper classification protects your right to negotiate your own contract terms, set your work schedules, and maintain the autonomy you need over your business operations.

Whether you’re an employer trying to classify workers correctly or an independent contractor wanting to protect your status, understanding worker classification is essential for protecting your rights and fulfilling the obligations that come with your role.

Classification Tests

Classification tests are essential legal tools that help determine whether you’re working as an employee or operating as an independent contractor. If you’re facing questions about your work status, understanding these tests can make all the difference in protecting your rights.

The economic reality test, which gets applied under the Fair Labor Standards Act, looks at key factors like how much independence you have in your work, whether you’ve invested your own money into the business, and how much control you have over the way your work gets done.

You’ll also encounter the ABC test, which more and more states are adopting these days – this one puts the burden on the company hiring you to prove three things: that you’re free from their control, that the work you’re doing falls outside their usual business operations, and that you’re running your own independent business.

Other important factors that may come into play include whether you have the opportunity to make a profit or take a loss from your work, and how long your working relationship lasts. These tests aren’t just legal technicalities – they’re designed to make sure you get properly classified as a worker, which is crucial for ensuring you receive the rights you’re entitled to, including minimum wage protections, overtime pay, and access to important employment benefits like health insurance and pension plans.

Getting your classification right protects both you as a worker and your employer by making everyone’s legal responsibilities crystal clear and reducing the risk of costly disputes down the road.

Understanding the Employee or Independent Contractor Law

Understanding the law surrounding employment status can help you navigate the complex requirements that affect both employers and independent contractors. Federal laws like the Fair Labor Standards Act (FLSA) and state-specific regulations, such as California’s Assembly Bill 5, set out the rules for how you should classify workers and what obligations you need to meet.

If you’re an employee, you’re entitled to important protections such as minimum wage, overtime pay, and certain benefits, and your employer is required to pay employment taxes and comply with other legal requirements on your behalf. As an independent contractor, by contrast, you’re responsible for paying your own taxes, including self-employment and Medicare taxes, and you typically won’t receive employee benefits.

However, you often get to enjoy greater flexibility and control over how you work. With the rise of the gig economy, it’s more important than ever for you to understand these laws, whether you’re an employer or worker, so you can ensure proper classification and stay aware of your rights and responsibilities under both federal and state laws.

Having this knowledge can help you prevent costly legal disputes and ensures you stay in compliance with evolving employment regulations that could affect your business or career.