Employee or Independent Contractor: Why does it matter?

All businesses operated by persons other than their owners face potential liability for misclassification of those third-party workers as “independent contractors” when they are really employees.  Oftentimes, business owners are not even aware of a problem until they are served with a lawsuit or wage claim by a disgruntled worker.  Depending on the size of the business, misclassification can result in devastating damages awards including overtime and minimum wages, penalties, interest and attorneys’ fees.  Further, the putative employer may be penalized for failing to do payroll withholding and purchase workers’ compensation insurance.

All businesses operated by persons other than their owners face potential liability for misclassification of those third-party workers as “independent contractors” when they are really employees.  Oftentimes, business owners are not even aware of a problem until they are served with a lawsuit or wage claim by a disgruntled worker.  Depending on the size of the business, misclassification can result in devastating damages awards including overtime and minimum wages, penalties, interest and attorneys’ fees.  Further, the putative employer may be penalized for failing to do payroll withholding and purchase workers’ compensation insurance.

Employee or Independent Contractor: Factors to Consider

How does an employer properly determine whether a worker is correctly classified?  Even though a worker is given the title of “contractor,” signs an Independent Contractor agreement or is issued an IRS Form 1099, for purposes of determining the correct classification of a worker, the courts use a control test.  The factors include:

• Whether the person to whom service is rendered (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.
• 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 the 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, 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 is not determinative since this is a question of law based on objective tests.  S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341.

A thorough and pro-active risk management plan for your business should include a review of current worker classifications using these factors as a guide.

Meal and Rest Periods

Under California’s Industrial Welfare Commission orders and California Labor Code Section 512, employees must be provided with no less than a thirty-minute meal period when the work period is more than five hours.  Unless the employee is relieved of all duty during the entire thirty-minute meal period and is free to leave the employer's premises, the meal period shall be considered “on duty,” counted as hours worked and paid for at the employee’s.   The IWC orders require that employers must authorize and permit nonexempt employees to take a rest period that must, insofar as practicable, be taken in the middle of each work period. The rest period is based on the total hours worked daily and must be at the minimum rate of a net ten consecutive minutes for each four hour work period, or major fraction thereof.  If an employer fails to provide an employee a rest period in accordance with an applicable IWC order the employer shall pay the employee one additional hour of pay at the employee’s regular rate of pay for each workday that the rest period is not provided.

California Labor Code Section 226.7.  In order to avoid potential liability, best employer practices should include: (1) staff training on the employer’s policy of meal and rest periods, (2) disciplining of employees who do not abide by the employer policies and (3) employer documentation (such as on time cards) which contain an employee acknowledgement that all meal and rest periods were taken.