Want to Read More? To continue reading this article, please Log in or Register Now

Independent Contractors: California

Independent Contractors requirements for other states

Federal law and guidance on this subject should be reviewed together with this section.

Author: Anthony J. Oncidi, Proskauer Rose LLP

Summary

  • California generally applies common law principles in determining whether a worker is an employee or an independent contractor. However, as in most states, different independent contractor tests are used for different purposes. See Determining Whether a Worker Is an Employee or an Independent Contractor.
  • Businesses that hire independent contractors must file certain reports and avoid workplace harassment. See Hiring and Managing Independent Contractors.
  • Employers that misclassify employees as independent contractors in California may be liable for income tax withholdings, unpaid wages and wage-related penalties, state disability and unemployment insurance contributions, workers' compensation insurance premiums, liability to employees and third parties for workplace injuries, as well as other civil penalties and fines. See Consequences of Misclassification.

Determining Whether a Worker Is an Employee or an Independent Contractor

The complexity involved in ensuring the proper classification of service providers is rooted in the multiplicity of legal standards applied by the various jurisdictions and entities to which employment status is relevant.

As discussed above, the federal government, principally through the IRS, applies one set of tests, which is then supplemented by state laws that differ slightly from the federal standard.

As in most states, California applies different independent contractor tests for different purposes, including unemployment benefits, disability insurance, state income taxes, wage orders and workers' compensation.

Accordingly, it is important to consider a broad range of factors in evaluating the classification of California workers.

Unemployment, Disability Insurance and Payroll Taxes

California courts and administrative agencies generally apply common law principles in evaluating independent contractor relationships. There are several distinct sets of criteria applicable to the determination of a worker's status as an employee or independent contractor for unemployment and disability insurance purposes.

First, the California Code of Regulations, which governs the definition of "employee" for unemployment benefits determinations, uses the "control test" as the primary means of determining whether or not a worker is an employee or an independent contractor.

Under the "control test," an employer-employee relationship exists if the employer has "the right to control the manner and means of accomplishing the desired result, whether or not that right is exercised."

Strong evidence of the right to control is the principal's right to discharge the service provider at will and without notice. If the control test does not resolve the matter, the following factors are considered:

  • Whether or not the one performing the services is engaged in an established occupation or business separate from that of the principal;
  • The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of a principal without supervision;
  • The skill required in performing the services and accomplishing the desired result;
  • Whether the principal or the person providing the services supplies the instrumentalities, tools, and the place of work for the person doing the work;
  • The length of time for which the services are performed, to determine whether the performance is an isolated event or continuous in nature;
  • The method of payment, whether by time, by a piece rate or by the job;
  • Whether or not the work is part of the regular business of the principal;
  • Whether or not the parties believe they are creating the relationship of an employer and employee;
  • The extent of actual control exercised by the principal over the manner and means of performing the services; and
  • Whether the principal is engaged in a business enterprise or the services being performed are for the benefit or convenience of the principal as an individual.

+22 CCR 4304-1.

Neither the existence of a written independent contractor agreement nor the fact that the worker is issued a 1099 form rather than a W-2 form is enough to establish that a worker is an independent contractor.

It should also be noted that some case law holds that the economic realities test rather than the control test is applicable in the unemployment insurance context. See Workers' Compensation.

The California Employment Development Department (EDD), which is responsible for employment tax collection and administration, has issued guidance meant to "advise" employers in complying with state regulations. Similar to the regulations, the EDD's analysis is two-fold. First, a worker is an employee if:

  • The worker can quit or be fired at any time without liability for failing to complete the job;
  • A manager assigns, reviews and supervises the work; and
  • The worker performs services that are "a part of the regular operation" of the business.

If these factors do not support one particular result over another, the EDD then considers a set of 24 factors, which are similar to the federal common law factors.

Wage Orders

A worker will be considered an employee under the Industrial Welfare Commission (IWC) Wage Orders - which govern minimum wages, overtime, show-up time / reporting time requirements, meal and rest breaks and other working conditions - unless the hiring entity can show that the worker:

  1. Is free from control and direction of the work, both under the contract and in fact;
  2. Performs work that is outside the usual course of its business; and
  3. Is customarily engaged in an independently established trade, occupation or business.

Dynamex Operations West, Inc. v. Superior Court, +2018 Cal. LEXIS 3152 (Cal. 2018).

On May 2, 2019, the 9th Circuit Court of Appeals held that the Dynamex test applies retroactively. Vazquez v. Jan-Pro Franchising Int'l, Inc., +2019 U.S. App. LEXIS 13237 (9th Cir. 2019). However, on July 22, 2019, the 9th Circuit withdrew its Vazquez opinion and said it will ask the California Supreme Court to decide the question of whether Dynamex applies retroactively.

The Dynamex test applies only to claims based on an IWC Wage Order. In a May 3, 2019, opinion letter, the California Division of Labor Standards Enforcement (DLSE) said it will apply the Dynamex test to claims that derive directly from obligations imposed by a wage order, including sections of the California Labor Code enforcing:

The Borello ruling (used for workers' compensation) furnishes the proper standard as to non-wage-order claims. Garcia v. Border Transportation Group, LLC, +28 Cal. App. 5th 558 (Cal. App. 4th Dist. 2018).

A California appeals court has held it does not appear that the California Supreme Court intended for the Dynamex test to be applied in joint employment cases. Curry v. Equilon Enterprises, LLC, +23 Cal. App. 5th 289 (Cal. App. 4th Dist. 2018).

Workers' Compensation

The Division of Labor Standards Enforcement (DLSE), which enforces California's workers' compensation insurance, assumes that a worker is an employee unless the following 12 factors, known as the economic realities test, show that he or she is an independent contractor:

  • Whether the person performing the services is engaged in an occupation or business distinct from that of the principal;
  • Whether the work is a part of the regular business of the principal;
  • 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;
  • The skill required of the particular occupation;
  • The type of occupation, with reference to whether the work is customarily performed in the locality 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;
  • Whether or not the parties believe they are creating an employer-employee relationship; and
  • The nature and degree of control of the principal retains over the worker, both as to the work done and the manner and means in which it is performed.

S.G. Borello & Sons, Inc. v. Department of Industrial Relations, +48 Cal. 3d 341 (1989).

While none of these factors alone is enough to establish that a worker is an employee or an independent contractor, the final factor (concerning the degree of control exerted by the employer) is given greater weight than the others.

Even absent control over the granular details of the work, an employer-employee relationship will be found if:

  • The employer retains pervasive control over the operation as a whole;
  • The worker's duties are an integral part of the operation;
  • The nature of the work makes detailed control unnecessary; and
  • Adherence to the statutory purpose favors a finding of coverage.

Here again, in determining whether a worker is an employee or independent contractor, neither the existence of a written agreement purporting to establish an independent contractor relationship nor the fact that a worker is issued a 1099 form instead of a W-2 is dispositive of the analysis.

California Fair Employment and Housing Act

The Fair Employment and Housing Act (FEHA) protects independent contractors from unlawful harassment. For purposes of the FEHA, an "employee" is defined as any "person providing services pursuant to a contract." +Cal Gov Code § 12940.

This definition also applies to the California Family Rights Act (CFRA). See Harassment and Discrimination Laws.

Hiring and Managing Independent Contractors

Fulfilling Reporting Requirements

Businesses that hire independent contractors must file reports with the California EDD containing specified identification information for both the service recipient and the independent contractor.

All required information must be reported within 20 days of paying the independent contractor at least $600 or entering into a contract whereby the independent contractor will make at least $600 in the aggregate in any calendar year.

Failure to comply with the independent contractor reporting requirements can subject a service recipient to a penalty of $24 per contractor, although service recipients are not required to report independent contractors that are corporations, general partnerships, limited liability partnerships or limited liability companies.

Harassment and Discrimination Laws

Independent contractors are specifically protected from workplace harassment under FEHA.

FEHA makes it unlawful to harass any "person providing services pursuant to a contract" on the basis of race, national origin, ancestry, physical or mental disability, medical condition, religious creed, marital status, gender, age or sexual orientation.

The law prohibiting harassment of independent contractors also requires businesses to take all reasonable steps to prevent such harassment. In contrast, FEHA's anti-discrimination and anti-retaliation provisions do not protect independent contractors.

Consequences of Misclassification

When a government agency finds that a worker is misclassified as an independent contractor, the service recipient may be subject to income tax liability for monies that should have been withheld from the "wages" of the "employee."

Liability could also include overtime payments and other wage claim liability, state unemployment insurance payments, workers' compensation insurance premiums (along with potential liability for workplace injuries), and other civil penalties and fines.

Reclassified workers may also be entitled to coverage and benefits under applicable employee benefit plans.

Back Wages and Penalties

An employee or administrative official may file suit to recover back wages, and an equal amount in liquidated damages, plus attorney fees and court costs. In this area there is additional liability for overtime pay and other wage claims, including waiting time and meal and rest break penalties.

In addition to the above, California imposes a fine of $100 for each initial failure to pay an employee and $200 for each subsequent or willful/intentional violation, plus 25 percent of the amount unlawfully withheld.

Further, employers that fail to provide accurate itemized wage statements (including deductions) to employees for each pay period may be subject to penalties of $250 per employee for initial violations and $1,000 per employee for subsequent violations.

Disability and Unemployment Insurance Payments

Under California law, employers that fail to pay contributions for unemployment or state disability insurance benefits without good cause may be liable for a penalty of 10 percent of the amount of the contributions and for interest on any unpaid contributions.

The 10 percent penalty assessed is in addition to the amounts due for missed unemployment insurance contributions, disability insurance contributions and state income tax withholdings.

Workers' Compensation Insurance Premiums

For a willful failure to provide workers' compensation insurance, an employer can be subject to a penalty of 10 percent of any workers' compensation benefits recoverable by the injured employee as well as attorney fees. A penalty of up to $10,000 payable to the state may also be assessed.

In addition to premiums and any monies recouped by the California Division of Workers' Compensation, an employer can face liability for workplace injuries.

Reimbursements

Misclassified employees can seek reimbursement for business expenses incurred in performing their jobs. California law obligates employers to indemnify their employees for all expenditures and losses "necessarily incurred in direct consequence of the discharge of [the employees'] duties." +Cal Lab Code § 2802.

A finding of liability could result in a judgment for retroactive payments to improperly classified employees for all or some portion of their out-of-pocket expenses. These typically include computers, Internet fees, telephone payments, gas/mileage, business cards, tools and an array of other equipment.

Penalties for Willful Misclassification

California employers must pay increased fines if found liable for "willfully misclassifying" their employees as independent contractors or for deducting from the paychecks of misclassified workers any fees or other charges that could not be deducted from the paychecks of employees (for example, costs of workspaces, licenses and equipment).

"Willful misclassification" is defined as "avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor." The law provides for the assessment of civil penalties in the range of $5,000 to $15,000 for each violation and, for individuals found guilty of a "repeated pattern or practice" of such violations, the penalty may increase to between $10,000 and $25,000 per violation.

It also imposes joint and several liability upon any person who, for money or other valuable consideration, "knowingly advises" an employer to treat an individual as an independent contractor to avoid employee status when that individual is later found to be an employee.

Excepted from this provision are persons providing advice to their employer and licensed attorneys dispensing legal advice during the course of practicing law.

Future Developments

There are no developments to report at this time. Continue to check XpertHR regularly for the latest information on this and other topics.