California Labor Code section 3353 defines an Independent contractor as a “person who renders service for a specified recompense for a specified result, under the control of his principal as to the result of his work only and not as to the means by which such result is accomplished.” The label placed by employers, however, does not designate the relationship. Rather, the employer has to do a thorough analysis of the facts and compare them to the laws regulating this issue.
Within the last several years, both the State of California and the Internal Revenue Service (IRS) have aggressively scrutinized the classification of a worker by a business in order to determine whether the worker is an employee versus an independent contractor.
Under California labor law, whether a worker is an employee or an independent contractor depends on the application of the factors contained in the California common law or employment and statutory provisions of the California Unemployment Insurance Code.
Pursuant to California labor law, the basic test for determining whether a worker is an independent contractor versus an employee is whether the employer has the right to direct and control the manner and means by which the work is performed. If the employer is unclear whether the worker or the employer has the “right of control”, the employer should review and analyze a list of secondary factors that serve as evidence of the existence or nonexistence of the right of control.
The IRS has a checklist of 20 factors, which are based on the common law as developed in past court cases and administrative hearing. These factors, found at 4600 IRS manual, are:
- PROFIT OR LOSS. Can the worker make a profit or suffer a loss as a result of the work aside from the money earned on the project?
- INVESTMENT. Does the worker have an investment in the equipment and facilities used to do the work? The greater the investment, the more likely independent contractor status will be found.
- WORK FOR MORE THAN ONE CLIENT. Does the worker perform services for more than one client at a time?
- SERVICES OFFERED TO THE GENERAL PUBLIC. Does the worker offer services to the general public?
- INSTRUCTIONS. Does the business have the right to give the worker instructions about when, where and how to perform the services?
- TRAINING. Does the business train the worker to do the job in a particular manner?
- INTEGRATION. Are the worker’s services so important to the business that those services have become a necessary part of the business?
- HIRING ASSISTANTS. Does the business hire, supervise and pay the worker’s assistants or staff?
- SERVICES RENDERED PERSONALLY. Does the business require that the worker provide the services personally or may the services be delegated to someone else?
- WORK HOURS. Does the business set the work hours or is the worker the master of his/her own time?
- CONTINUING RELATIONSHIP. Is there an ongoing relationship between the worker and the business?
- WORK PERFORMED ON PREMISES OF BUSINESS. Must the worker perform the services on the premises of the business, or does the business control the route or location where the services are performed?
- SEQUENCE OF SERVICES. Does the business have the right to control and determine the order in which services are performed?
- REPORTS REQUIRED. Is the worker required to submit reports accounting for the worker’s actions?
- PAY SCHEDULE. Is the worker paid by the hours, day, week, or month as opposed to being paid by the job or on commission?
- EXPENSES. Is the worker reimbursed for expenses for business or travel costs?
- TOOLS AND MATERIALS. Is the worker provided by the business with the equipment, tools and/or materials necessary to perform the services?
- EMPLOYER’S RIGHT TO TERMINATE. May the business fire the worker at any time?
- FULL TIME EMPLOYMENT. Is the worker required to work full time for your company?
- LIMITATION OF SERVICES. Does the worker limit the availability of his services to the general public?
Typically, a worker requiring instructions, training, tools, equipment, a facility in which to perform the work, whose relationship with the employer is continuous, who is required to file reports and who is not allowed to retain his or her own assistants, will likely be considered an employee rather than an independent contractor.
Bear in mind, however, that these factors are only a guide for determining whether or not a service provider is an employee, and the IRS recognizes that the degree of importance of each factor varies depending upon the occupation and the actual context in which the services are performed.
The business must therefore be extremely cautious and exercise sound judgment in its classification of workers and thereby in distinguishing whether a worker is an employee versus an independent contractor. The business can implement methods such as the ones below, to help mitigate a potential misclassification:
- Ensure that the business has a written agreement (an independent contractor agreement) with its independent contractors and that the independent contractor agreement describes the scope of the work to be performed, the compensation paid, the timing of the work and clearly define the independent contractor’s tax obligations;
- Ensure that the independent contractor has liability insurance, particularly if that contractor is a professional.
- Ensure that the independent contractor who is a professional has his or her pertinent license and that such license is current;
- Ensure that the independent contractor has a current business license from the city/county in which he or she is operating;
- Do not set independent contractor’s work hours;
- Do not provide the independent contractor with tools, equipment, software or supplies with which to perform his or her work;
- Do not provide the independent contractor any benefits, which the business provides to its employees.
- Do not retain or terminate or attempt to retain or terminate assistants or employees for or of the independent contractor.
- Ensure that the independent contractor submits invoices for his or her work.
