The term “independent contractor” is commonly understood as a person, who is not an employee, who provides labor or services to another person or company. While an employee is understood to be under the control, guidance, and authority of an employer, by contrast an independent contractor is generally understood to be an actually independent person in business for themselves.
In California, the rights of an independent contractor depend on whether they have been properly classified under the law as an independent contractor, or in the alternative, if they have been misclassified and are in-fact an employee. There are potentially very severe repercussions for misclassifying an employee, even if the misclassification was unintentional. Misclassifying an employee as an independent contractor can trigger stiff overtime wage obligations, taxation, and withholding liabilities, and protections against unlawful termination under the California Fair Employment and Housing Act (called the “FEHA”). For instance, a properly classified independent contractor is not entitled to overtime, even if they work longer than 8 hours per day or 40 hours per week. Similarly, since a properly classified independent contractor is not an employee, they by definition cannot have their employment terminated—let alone, unlawfully terminated—in violation of the independent contractor’s civil rights under the FEHA. Every year it generally gets tougher for an employer to properly claim their workers are independent contractors; California wants workers to be classified as employees and not as independent contractors.
It is therefore critical to have a basic understanding of how California determines whether a person providing labor to another is properly classified as an independent contractor, or is in-fact an employee.
How is an Independent Contractor Defined in California?
To complicate matters, California does not have a traditional definition of “independent contractor”. First, California has a general presumption that “any person rendering service for another, other than as an independent contractor, is presumed to be an employee.” (Cal. Lab. Code § 3357). It is assumed that a person providing services to another is an employee; it’s then up to the employer to prove that the worker is an independent contractor.
Remembering the general presumption, California typically uses two multi-factor balancing tests called the “ABC Test” and the “Borrello factors” to determine if a person has been properly classified as an independent contractor. The new “ABC Test” is thought to be more favorable to employees than the older “Borrello factors”, and the underlying employment issues dictate which test is used.
What are some of the factors courts look at?
This article does not discuss or list all the underlying factors in both tests. However, here are some of the more important factors courts look at and how they are applied.
The level of employee control. Both independent contractor tests look at whether the person hiring the contractor (called the “principal”) has the right to control the manner and means by which the worker accomplishes the work. In other words, the worker must be free from the control and direction of the person hiring them and mostly make their own decisions about how to get the job done. The more of a principal’s rules, policies, and procedures the independent contractor must follow, the more likely it is they are actually an employee. Independent contractors who must report to a specific place of work each day, who must work a schedule set by the principal, or who must wear a company uniform are probably not true independent contractors.
Whether the worker performs labor outside the usual course of the hiring entity’s business. Both tests look closely at what type of labor and function the worker is performing for the principal and how integral that employee’s work is to the principal’s business. For example, at a restaurant the jobs of cooking and preparing food, waiting tables, and washing dishes are integral to its core purpose of making and selling food. It would be difficult to argue that workers performing those functions are proper independent contractors. On the contrary, the function of repairing computers is not integral to the operation of a restaurant, even if computers are incidentally used in the operation of the business. Therefore, a worker hired periodically to repair the restaurant’s computers may very well be an independent contractor.
Whether the worker is engaged in an independently established trade or occupation of the same nature as the work performed. Both tests look to whether the worker is actually an independent business person, or on the contrary, whether they work exclusively for the principal as an employee would. In other words, does the independent contractor hold him or herself out to the public at-large as being able to perform the same type of work? For example, a tech consultant with their own LLC, website, business cards, and a long list of current clients would likely be a true independent contractor. On the contrary, an in-house tech support worker who only performs services for a single company and does not hold themselves out as a separate business is likely to be classified as an employee.
Independent Contractor Myths
Employers will frequently assert that if an employee uses their own tools they are automatically independent contractors. This is not the case. Whether or not a worker supplies their own “instrumentalities and tools” is just one factor in the multi-factor independent contractor test. Furthermore, to the extent that a worker provides their own tools, courts will determine how much investment the employee has in those tools (i.e. the cost of those tools). A restaurant chef that brings his own knife to work each day would not automatically be classified as an independent contractor, especially, if that same chef worked for one restaurant on a full-time basis and cooked a menu to the restaurant’s owners’ specifications.
Employers often over-rely on a contract with the worker, sometimes called an Independent Contractor Agreement. In these agreements, the worker and the principal agree in-writing, sometimes from the beginning of their relationship, that the worker will be designated as an independent contractor. These types of agreements are often void as contrary to California public policy, especially if minimum wage and overtime allegations are at issue. Even if the contract is not automatically void, the parties’ belief that they are in-fact creating an employer-employee relationship or principal-independent contractor relationship is just one factor in a multi-factor balancing test to determine the worker’s classification.
Repercussions for Misclassifying Independent Contractors
In California, employees of all types have a multitude of rights and protections, including but not limited to, the right to overtime pay, rest and meal breaks, reimbursement for expenses, and protection against unlawful discrimination in employment, including termination in violation of the California Fair Employment and Housing Act. While a properly classified independent contractor is typically limited to the rights under their contract, a misclassified independent contractor has the same rights and remedies as any employee. A misclassified independent contractor may therefore sue their former employer for wrongful termination and many other common wage-and-hour violations, albeit after establishing their misclassification. Employer’s often face tax consequences from misclassification of independent contractors, including claims from California’s Employment Development Department (called “the EDD”) if the misclassified independent contractor seeks unemployment benefits after their termination.
Do you believe you are an independent contractor who has been misclassified? Call the Law Office of Brian Mathias.