Independent Contractors

Companies can classify their workers as either employees or independent contractors. But what a company calls its workers does not determine their status under the law. Many companies misclassify their workers as independent contractors when they really should be treated as employees.

Under both California and federal law, the question of whether to classify a worker as an employee or as an independent contractor has major consequences for both workers and businesses. For example, when a worker is properly classified as an employee, the employer must comply with state and federal wage and hour laws. Employers must also pay federal Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, and worker’s compensation insurance. But if a worker is an independent contractor, the business does not bear any of those costs or responsibilities. Nor does the worker receive the protections of the applicable wage and hour laws.

On a practical level, this means that independent contractors are exempt from state labor laws that require meal and rest breaks, overtime pay, and minimum wages. For this reason, some companies purposely misclassify employees in order to avoid these protections.

Differences between Employees and Independent Contractors in California

Under California law, it is a company’s burden to prove that its workers are properly classified as independent contractors. For this reason, most workers in California should be classified as employees, and are entitled to the protections of the California Labor Code and Wage Orders.

In 2018, the California Supreme Court announced a new test for determining whether workers are employees under California law for purposes of the California wage orders. In Dynamex v. Superior Court, the Court adopted a very broad test that on a practical level means that most workers in California should be classified as employees.

Specifically, the Court held that workers were employees if the hiring business “suffered or permitted them to work.” Because that test is very broad, and could cover almost all situations, the Court held that a hiring company can establish that a worker is an independent contractor if it can meets the ABC test.

Under the ABC test, the hiring company must prove each of the following:

That the worker is free from control and direction in connection with the performance of his work, both under the contract at issue and in fact.

The Court noted that under the common law test, the primary test was the right to control the worker, both under the contract and in fact. Thus, where a hiring entity can prove that a worker is free of such control, it meets part A of the test.

A. That the worker performs work that is outside the usual course of the hiring entity’s business.

The Court noted that individuals who work in a hiring company’s business should normally be classified as employees. Thus, a plumber or an electrician hired to work on a specific project might be an independent contractor. But a seamstress who is hired to make dresses that are sold by a company is part of the company’s business operation and would normally be viewed as an employee. The Court noted that this requirement ensures that workers receive the protections of the wage orders. It also encourages companies to comply with the wage order’s obligations, and discourages companies from undercutting competitors by engaging in unlawful conduct.

B. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

The Court noted that the term “independent contractor” historically has referred to workers who independently made the decision to go into business. Such workers normally take steps to form and operate their independent business. Absent an independent business, there is a risk that the hiring company is trying to evade the wage orders.

C. For claims that are not brought under the California Wage Orders, the common law test applies. Under that test, the primary factor in determining whether a worker is an employee is the amount of control that the hiring business can exert over the worker. This is sometimes referred to as the “right of control,” and refers to who can control where, when, and how the worker performs his or her work. It is important to note that it is the right to control, and not the actual exercise of that control, that matters. (The test is different under federal law.)

Other factors used to determine employment status under the common law test include:

• Whether the individual who performs the services is involved in a distinct occupation or business.
• Whether the work is typically done by a specialist without supervision or under the direction of the principal.
• The skills that are required for a specific occupation.
• How long the services are needed to be performed.
• The method of payment an individual receives, such as by job or by time.
• Who provides the place of work, instrumentalities, or the tools required for the work.
• Whether or not the specific work that is being done is part of the regular business of the principal.
• Whether both parties believe if they are creating an employer-employee relationship.