This is one of the most critical employment-related questions a company must consider since the costs of violating California law can deal a death blow to a small business and possibly the financial stability of the owners and decision-makers of the company to the extent they may be personally liable for such costs.
Misclassifying workers as independent contractors rather than employees is a common method for attempting to avoid paying overtime, providing worker’s compensation insurance, employee breaks, and other benefits required by California law. However, if caught, it is often the most expensive decision a business may face.
So how does a company determine whether a worker is an employee or independent contractor?
The Division of Labor Standards Enforcement (DLSE) and California courts utilize a “multi-factor” or “economic realities” test which was adopted by the California Supreme Court in S. G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 341. The most significant factor in determining whether a worker is an employee or not is whether the employer 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.
In a more recent case, the California Supreme Court further clarified that “What matters under the common law is not how much control a hirer exercises, but how much control the hirer retains the right to exercise.” The Court also noted that the strongest evidence of this right to control is whether the worker can be discharged without good cause. See Ayala v. Antelope Valley Newspapers, Inc., No. S206874 (June 30, 2014). Therefore, if a worker’s relationship with the company may be terminated at any time without notice or fault, this fact alone will typically weigh heavily in favor of finding that an employer-employee relationship exists.
Additional factors which a company must consider in applying the economic realities test include:
- Whether the worker 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 worker;
- The worker’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 specialized skill;
- The kind of occupation which is typically done under the direction of the principal or by a specialist, without supervision, keeping in mind local customs and standards;
- The worker’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).
Furthermore, an employer-employee relationship will be found, even where there is an absence of control over work details, if a) the principal retains pervasive control over the operation as a whole, b) the worker’s duties are an integral part of the operation, and c) the nature of the work makes detailed control unnecessary. See Yellow Cab Cooperative v. Workers Compensation Appeals Board (1991) 226 Cal.App 3d 1288).
The DLSE, which is concerned with the enforcement of wage, hour and worker’s compensation laws, as well as California courts, typically begin the analysis with a rebuttable presumption that a worker is an employee, not an independent contractor. The presumption may be rebutted by evidence which indicates a worker is truly an independent contractor, but the burden of proof is squarely on the employer. Given this, it is imperative that an employer undertake to evaluate the facts of each service relationship in which it intends to classify a worker as an independent contractor, and apply the law to those facts.
In sum, California law will often lead to the conclusion that an employer-employee relationship exists even where federal or other states’ laws would dictate otherwise. If a company cannot produce evidence to support a finding that a worker is an independent contractor, as set forth in previous opinions, the DLSE or courts will normally find that a worker is an employee because of the presumption which exists under California law.
Therefore, it is critical to utilize the economics realty test before classifying a worker as an independent contractor. If the worker is classified as an employee, this analysis is not required since there is no risk of incurring penalties.