Employers’ risk of liability for the misclassification of workers continues to grow, as employee misclassification remains a top enforcement priority for the U.S. Department of Labor (“DOL”), and class actions asserting misclassification claims are filed almost daily in federal and California state courts. Employers regularly using independent contractors should examine those relationships periodically to ensure that the classification remains defensible.
Determining whether a worker is an employee or independent contractor under federal or state law is highly fact-specific. Courts, the DOL and other federal and state agencies have developed various tests for determining whether employee or independent contractor status including economic realities test and the “right to control” test. These tests have multiple factors, and no one factor is controlling. In general, however, the greater the control that a company has over a worker, the more likely it is that the worker is an employee, not an independent contractor.
Here is a list of 10 questions to ask to assess whether your company may face worker misclassification risks:
- Do the contractors perform work that is integral to your business? In an unpublished case, Garcia v. Seacon Logix, Inc., the California Court of Appeal ruled that delivery truck drivers working in the Port of Los Angeles, who were classified as independent contractors, actually were employees of a trucking company. Because the trucking company’s business consisted almost entirely of transporting cargo, the drivers’ work transporting that cargo did not constitute a distinct occupation or business.
- Do the contractors operate their own business, have their own business tax identification number, have business bank accounts or have other clients? True contractors are in business for themselves and should have all of the indicia of stand-alone business.
- Do the contractors bear the risk of profit or loss? True contractors exercise their managerial skills to make a profit or experience a loss, by making decisions about future business, engaging additional jobs, allocating resources or obtaining materials.
- Does the company closely supervise contractors’ work? In the trucking case, the company set the drivers’ hours, approved requests for absences, controlled the delivery assignments, monitored the progress of deliveries, and prohibited the drivers from declining assignments, all of which weighed in favor of employee status.
- Does the job have a fixed end date? Permanency or indefiniteness in the relationship suggests that the worker is an employee, not an independent contractor. True contractors usually enter into project-based agreements to perform a specific task or provide a specific service. Once the job is completed, the relationship ends. By contrast, in the trucking case, the drivers reported for duty every day, and, when drivers took time off, they were terminated, thus indicating that they were employees.
- Do the contractors supply their own equipment, tools or supplies? In the trucking case, the company owned the trucks and leased them to the drivers.
- Does the work performed require unique skills or initiative? True contractors typically possess specialized skills that they use in an independent way, demonstrating business initiative.
- Is the company invoiced for the contractors’ services? True contractors send their clients bills for their work with specific payment terms and bear the risk of nonpayment. The company pays invoices through accounts payable. True contractors do not receive regular paychecks from their clients.
- Are the contractors paid by time worked, rather than on a project/job completion basis? If contractors are paid based on the time spent working, rather than by the project, it is more likely that an employment relationship exists.
- Have the parties entered into independent contractor agreements? Although the existence of a written agreement is not determinative of independent contractor status, an agreement specifying the project or services provided, the fee, the completion date, and clear provisions outlining the contractor’s responsibilities to pay all taxes and provide insurance may demonstrate that the parties intended to create an independent contractor relationship.
By reviewing their actual relationships with workers classified as independent contractors, companies can obtain a better understanding of their potential risk of misclassification liability and take steps to minimize those risks.