One of the most litigated issues in Wage & Hour law is that of misclassification. That is, whether an employer has misclassified its employees as independent contractors. One reason for this is the common misunderstanding of what “independent contractor” actually means. For many employers, this term means simply that a worker is temporary, off-site, or part-time. However, this is not the case. A determination of whether a worker is an independent contractor or employee requires a complex, multi-faceted analysis that leaves much room for argument and litigation. Further, the analysis is different in different arenas. For example, the IRS has its own set of factors, as does the DLSE. For employers in California, a good place to start would be the DLSE’s statement of the legal framework for distinguishing independent contractors from employees.
The DLSE starts its analysis with the presumption that a worker is an employee. Cal Lab Code § 3357. However, as this is a rebuttable presumption, the true determination of whether a worker is an independent contractor or employee depends on a number of factors, all of which are important, and none of which is controlling. In most cases, the DLSE will apply the “multi-factor” or “economic realities” test set out by the California Supreme Court in S. G. Borello. S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal. 3d 341. In this test, the most significant factor 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. The
DLSE may also consider the following factors:
1. Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
2. Whether or not the work is a part of the regular business of the principal or alleged employer;
3. Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
4. The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
5. Whether the service rendered requires a special skill;
6. 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;
7. The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
8. The length of time for which the services are to be performed;
9. The degree of permanence of the working relationship;
10. The method of payment, whether by time or by the job; and
11. 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.
As with all factor tests, the devil is in the details. Further, the economic realities test is unusually complex and may be applied in different ways depending on the circumstances. Indeed, as is demonstrated by the increase in misclassification litigation during the past few years, employers can get their analysis wrong and open themselves up to litigation. However, it is helpful to explore the DLSE’s guidance on this issue because, as discussed above, many employers (as well as employees) fundamentally misunderstand what characteristics distinguish an independent contractor from an employee and simply reviewing the factors above may help employers realize that the analysis is much more complex than they had originally thought.
Sean Haddad is a business and employment attorney at Appell Shapiro, LLP in Los Angeles, California.