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Employee vs. Independent Contractor: The Problem Of Employee Misclassification

On behalf of California Civil Rights Law Group posted in Wage and Hour Law on Tuesday, September 9, 2014.

As economic demands pressure businesses to take steps to remain competitive, employers often look to labor as a means of cutting costs and staying “lean.” For example, if the employer is a manufacturer, the company might enlist another company to manage the production arm of its business as an alternative to hiring its own employees. In other sectors such as service, outsourcing as a manufacturer might simply is not feasible. In such instances, many employers have taken to cutting costs by choosing to enlist independent contractors instead of employees.

In so doing, employers are able to avoid many of the costs and responsibilities that are associated with hiring actual employees, including unemployment insurance, workers’ compensation benefits, minimum wage, and overtime pay. Nor do employers have to pay taxes on independent contractors as they do with employees. In fact, a report from the National Conference of State Legislatures suggests that employers stand to save 30 percent of their labor costs by replacing employees with independent contractors.

In light of those cost and responsibility savings, employers have a strong incentive to classify their workers as independent contractors. It should not come as a surprise, then, that many independent contractors are misclassified as such simply because the employer wishes to avoid responsibility for those benefits and protections afforded to employees. Tragically, many workers who should be classified as employees simply do not realize that they have been wrongfully classified as independent contractors.

In addition to the workers being deprived of the benefits to which they would otherwise be entitled as employees, tax revenues at the state and federal level also take a severe hit, including funds for unemployment, Social Security and Medicare. According to the Government Accountability Office, employee misclassification cost these federal programs $2.72 billion in 2006.

How To Recognize Employee Misclassification

In California, the Supreme Court has offered considerable guidance on the legal differences between employees and independent contractors. However, not all guidance is equally helpful or concrete.

PRINCIPAL TEST: THE RIGHT OF CONTROL

In the matter of Tieberg v. Unemployment Ins. App. Bd., 2 Cal.3d 943, 946 (1970), the Court held that “[t]he principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.” In other words, if the employer merely controls the outcome (or the final product) of the worker’s labor, the Court has recognized that as an independent contractor relationship. Id. at 946-947. Conversely, if the employer controls means by which the worker accomplishes the task s/he is given, an employment relationship exists.

THE BORELLO FACTORS

However, as the California Supreme Court recognized nearly two decades later in a case called S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341, 350 (1989), the “right of control” test, when “applied rigidly and in isolation, is often of little use in evaluating the infinite variety of service arrangements.” Thus, the Court determined that, though it is no doubt the “most important” consideration, the “right to control” test’s inconclusive nature, the Court determined that additional factors (or Borello factors, as they are often called) are used to ascertain the relationship.

FACTOR #1: THE RIGHT OF DISCHARGE

The first factor the Borello Court noted was that the right of an employer to discharge a worker at will and without cause provides “strong evidence in support of an employment relationship.” Id. at 350-351 (citing Tieberg, supra, 2 Cal.3d at 949). That is, if a worker can be let go at any time for any reason, chances are s/he is an employee.

FACTOR #2: DISTINCT OCCUPATION

The next factor identified by the Borello Court is “whether the one performing services is engaged in a distinct occupation or business.” Id. at 351. For example, if the worker is a marketing consultant who provides her services to several businesses, each of those companies is not likely to be considered her employer, but her client. On the other hand, if the worker is only providing such services to one company, it might be argued that the worker is not engaged in a distinct occupation.

FACTOR #3: SUPERVISORY NATURE

The Borello Court then weighed “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.” Id. This subjective factor considers whether the specific work being performed is typically done independently or under the supervision of the company benefiting from those services. If the former, the worker may be an independent contractor; if the latter, s/he is more likely to be an employee.

FACTOR #4: REQUIRED SKILLSET

“[T]he skill required in the particular occupation” is also pertinent. Id. While a specialist is more likely to be an independent contractor, the scales are tipped toward employee when the worker is performing labor the does nor require a special skill or training.

FACTOR #5: WHO OWNS THE TOOLS?

According to the Court, one must then consider “whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work.” Id. If the principal own the tools necessary to perform the job or requires that the work be done at its place of business, such control is likely to weigh in favor of an employment relationship. For example, a limousine driver who must report to the principal’s place of business and use the principal’s limousine is more likely an employee than an independent contractor.

FACTOR #6: JOB VS. TIME

Another factor to be weighed is “the length of time for which the services are to be performed.” Id. If a worker has been enlisted indefinitely, s/he is more likely to be an employee, because s/he was hired to fill a position rather than perform a specific job.

FACTOR #7: PAYMENT METHOD

In that same vein, the way in which a worker also provides guidance as to the nature of the relationship. Specifically, courts consider “the method of payment, whether by the time or by the job.” If by time, the worker is more likely an employee than an independent contractor.

FACTOR #8: WHOSE BUSINESS?

It is true that many companies, regardless of their primary business, might enlist a consultant to offer guidance on certain issues from time to time. In most instances, that consultant (who is also likely being paid by the job) is an independent contractor. Conversely, a limousine service that relies on drivers to generate revenue is likely to have formed an employment relationship with those drivers. “[W]hether or not the work is a part of the regular business of the principal” is an important factor to consider. Id.

FACTOR #9: PARTIES’ BELIEF

The final factor the Borello Court considered was the belief of the principal and the worker when the relationship was formed. To properly assess the relationship, it is worth considering “whether or not the parties believe they are creating the relationship of employer-employee.” Id. While this factor alone is not by any means conclusive, if a worker believes s/he is an employee from the outset of the relationship, that belief carries some weight.

What’s Next?

Typically, the individual Borello factors are not to be seen as tests unto themselves. Id. (citing Germann v. Workers’ Comp. Appeals Bd., 123 Cal. App. 3d 776, 783 (1981). Rather, “they are intertwined and their weight depends often on particular combination” of factors. Id. As such, these factors, while useful in assessing the condition of an individual worker, do not provide a concrete test for the existence of an employment relationship.

That said, the California Supreme Court has concluded that “the ‘control-of-work-details’ test for determining whether an ’employee’ or an excluded ‘independent contractor’ must be applied with deference to the purposes of the protective legislation” embodied in the Workers’ Compensation Act. (cite). To be sure, “[t]he Act must be liberally construed to extend benefits to persons injured in their employment.” Id. at 349. Accordingly, the principal who wishes to avoid the responsibilities of the employment relationship bears the burden of demonstrating that a worker is an independent contractor. Id.

Given the somewhat ambiguous way that courts assess the employment relationship, it is important that workers who suspect that they have been misclassified contact an employment attorney right away.

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