Am I an Independent Contractor

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5/16/13 Independent contractors

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Independent contractor versus employeePrinter friendly version

Not all workers are employees as they may be volunteers or independent contractors. Employers oftentimes

improperly class ify their employees as i ndependent contractors s o that they, the em ployer, do not have to pay

payroll taxes, the minim um wage or overtime, comply with other wage and hour law requirem ents such as

providing meal periods and rest breaks, or reimburse their workers for business expenses incurred in

performing their jobs. Additionally, employers do not have to cover independent contractors under workers

compens ation insurance, and are not liable for payments underunemployment insurance, disability insurance,

or social security.

The state agencies m ost involved with the determination of independent contractor status are the Employment

Development Department (EDD), which is concerned with employment-related taxes, and the Division of Labor

Standards Enforcement (DLSE), which is concerned with whe ther the wage, hour and workers compensation

insurance laws apply. There are other agencies, such as the Franchise Tax Board (FTB), Division of WorkersCompens ation (DWC), and the Contractors State Licensing Board (CSLB), that also have regulations or

requirements concerning independent contractors. Since different laws m ay be involved in a particular si tuation

such as a termination of employment, it is possible that the same individual may be considered an em ployee for

purposes of one law and an independent contractor under another law. Because the potential liabilities and

penalties are significant if an individual is treated as an independent contractor and later found to be an

employee, each working relationship shou ld be thoroughly researched and analyzed before it is established.

There is a rebuttable presumption that where a worker performs services that require a license purs uant to

Business and Professions Code Section 7000, et seq., or performs s ervices for a person who is required to

obtain such a license, the worker is an employee and not an independent contractor. Labor Code Section 2750.5

1. Q. How do I know if I am an employee or an independent contractor?

A. There is no s et definition of the term "independent contractor" and as such, one mus t look to the

interpretations o f the courts and enforcement agencies to decide if in a particular situation a worker is an

employee or independent contractor. In handling a matter where employment status is an is sue, that is,

employee or independent contractor, DLSE starts with the presum ption that the worker is an employee.

Labor Code Section 3357. This is a rebuttable presumption however, and the actual determination of

whether a worker is an em ployee or independent contractor depends upon a number of factors, all of which

must be cons idered, and none o f which is controlling by itself. Consequently, it is neces sary to closely

examine the facts of each service relationship and then apply the law to those facts. For mos t matters before

the Division of Labor Standards Enforcement (DLSE), depending on the remedial nature of the legislation at

issue, this means applying the "multi-factor" or the "economic realities " test adopted by the California

Supreme Court in the case ofS. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341.

In applying the economic realities test, the most s ignificant factor to be considered is whether the person to

whom s ervice is rendered (the employer or principal) has control or the right to control the worker both as to

the work done and the manner and m eans in which it is performed. Additional factors that may be

considered depending on the issue involved are:

1. Whether the person performing se rvices is engaged in an occupation or business distinct from that

of the principal;

2. Whether or not the work is a part of the regular bus iness of the principal or alleged employer;

3. Whether the principal or the worker supplies the instrumentalities, tools, and the place for the

person doing the work;

4. The alleged employees investment in the equipmen t or materials required by his or her task or his

or her employment of helpers;

5. Whether the service rendered requires a special s kill;

6. The kind of occupation, with reference to whether, in the locality, the work is us ually done under the

direction of the principal or by a specialist without supervision;

7. The alleged employees opportunity for profit or loss depending on h is or her managerial skill;

8. The length of time for which the services are to be pe rformed;

9. The degree of permanence of the working relationsh ip;

10. The method of payment, whether by time or by the job; and

11. Whether or not the parties beli eve they are creating an em ployer-employee relationship may have

some bearing on the question, but is not determinative since this is a question of law based on

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objective tests.

Even where there is an abs ence of control over work details, an emp loyer-employee relationship will be

found if (1) the principal retains pervasive control over the operation as a whole, (2) the workers duties are

an integral part of the operation, and (3) the nature of the work makes detailed control unneces sary. (Yellow

Cab Cooperative v. Workers Compensation Appea ls Board(1991) 226 Cal.App.3d 1288)

Other points to remember in determining whether a worker is an emp loyee or independent contractor are

that the existence of a written agreement purporting to establish an independent contractor relationship is

not determinative (Borello, Id.at 349), and the fact that a worker is iss ued a 1099 form rather than a W-2 form

is als o not determinative with respect to independent contractor status. (Toyota Motor Sales v. Superior Court

(1990) 220 Cal .App.3d 864, 877)

2. Q. The person I work for tells me that I am an independent contractor and not an employee. He does notmake any payroll deductions or withholdings for taxes, social security, etc., when he pays me, and at the

end of the year he provides me with an IRS form 1099 rather than a W-2. By paying me in this manner

does it mean I am automatically an independent contractor?

A. No. The fact that a person who provides s ervices is paid as an independent contractor, that is, without payroll

deductions and wi th income reported by an IRS form 1099 rather than a W-2, is of no s ignificance

whatsoever in determining employment status. Your employer cannot change your status from that of an

employee to one of an independent contractor by illegally requiring you to ass ume a burden that the law

impos es directly on the employer, that being, withholding payroll taxes and reporting such withholdings to

the taxing authorities.

3. Q. Does it make any difference if I am an employee rather than an independent contractor?

A. Yes, it does make a difference if you are an employee rather than an independent contractor. Californias

wage and hour laws (e.g., minim um wage, overtime, meal pe riods and res t breaks, etc.), and anti-

discrimina tion and retaliation l aws protect employees, but not independent contractors. Additionally,employees can go to state agencies such as DLSE to seek enforcement of the law, whereas independent

contractors m ust go to court to se ttle their disputes o r enforce other rights under their contracts.

4. Q. When I started my current job my employer had me sign an agreement stating that I am an independent

contractor and not an employee. Does this mean I am an independent contractor?

A. No. The existence of a written agreement purporting to establis h an independent contractor relationship is

not determinative. The Labor Commis sioner and courts will l ook behind any such agreement in order to

examine the facts that characterize the parties actual relations hip and m ake their determination as to

employment status based upon their analysis of such facts and application of the appropriate law.

5. Q. How can it be that the Labor Commissioner determined I was an employee with respect to a wage claim I

filed and won, and the Employment Development Department (EDD) determined I w as an independent

contractor, and denied my claim for unemployment insurance benefits?

A. There is no s et definition of the term "independent contractor" for all purposes , and the iss ue of whether a

worker is an em ployee or independent contractor depends upon the pa rticular area of law to be applied. For

example, in a wage claim where employment status is an i ssue , DLSE will often use the five-prong

economic realities test to decide the issue. However, in a separate matter before a different state agency

with the same parties and s ame facts, and employment status again being an iss ue, that agency may be

required to us e a different test, for example, the "control test," which may result in a different determination.

Thus, it is possible that the same individual will be considered an employee for purposes of one law and an

independent contractor under another.

6. Q. As an employer, what obligations do I have to purchase Workers Compensation Insurance or comply

with other labor laws for persons classified as independent contractors?

A. Employers often improperly classify their employees as independen t contractors to avoid paying payroll

taxes, minimum wage or overtime, or complying with other wage and hour requirements such as providing

meal periods and rest breaks , etc. Additionally, employers do not have to cover independent contractors

under Workers Compens ation Insurance. However, because potential liabilities and penalties aresignificant it is im portant that each working relationship be thoroughly researched and analyzed before

classifying an individual as an independent contractor and not an employee. You should understand that the

DLSE presumes that the worker is an employee (Labor Code Section 3357). However, the actual

determination of whether a worker is an employee or independent contractor depends upon a number of

factors which must be considered. Cons equently, it is necessary to closely examine the facts of each

relationship and then apply the law to those facts. The mos t significant factor to be considered i s whether the

person to whom service is rendered (the employer or principal) has control or the right to control the worker,

the work to be done and the m anner and means in which it is performed.

7. Q. What can I do if I believe my employer has misclassified me as an independent contractor and as a

result am not being paid any overtime?

A. You can eitherfile a wage claim with the Division of Labor Standards Enforcement (the Labor

Commissioner's Office), or you can file an action in court to recover the lost overtime premiums. In both

situations, it will first be neces sary to determine your employment status, that is, employee or independen t

contractor, before the issue of overtime can be addres sed and decided. Additionally, if it is determined that
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Copyright 2013 State of California

you are an em ployee and you no longer work for this employer, you can make a claim for the waiting time

penalty pursuant to Labor Code Section 203. Eligibility for this penalty is dependent upon your employment

status, as independent contractors are ine ligible for the waiting time penalty.

8. Q. What is the procedure that is followed after I file a wage claim?

A. After your claim is completed and filed wi th a local office of the Division of Labor Standards Enforcem ent

(DLSE), it will be ass igned to a Deputy Labor Comm iss ioner who will determine , based upon the

circumstances of the claim and information presented, how best to proceed. Initial action taken regarding the

claim can be referral to a conference or hearing, or dismis sal of the claim.

If the decision is to hold a conference, the parties wil l be notified by mail of the date, time and place of the

conference. The purpos e of the conference is to determine the validity of the claim , and to see if the ma tter

can be res olved without a hearing. If the claim is not resolved at the conference, the next step usually is to

refer the matter to a hearing or dism iss it for lack of evidence.

At the hearing the parties and witnes ses testify under oath, and the proceeding i s recorded. After the

hearing, an Order, Decision, or Award (ODA) of the Labor Comm iss ioner will be served on the parties.

Either party may appeal the ODA to a civil court of compe tent jurisdiction. The court will set the m atter for trial,

with each party having the opportunity to present evidence and witnes ses. The evidence and testimony

presented at the Labor Commissioners hearing will not be the basis for the courts decision. In the case of

an appeal by the emp loyer, DLSE may represent an employee who is financially unable to afford counsel in

the court proceeding.

See the Policies and Procedures of Wage Claim Processing pamphle t for more detail on the wage claim

process procedure.

9. Q. What can I do if I prevail at the hearing and the employer doesnt pay or appeal the Order, Decision, or

Award?

A. When the Order, Decision, or Award (ODA) is in the em ployee's favor and there is no appea l, and the

employer does not pay the ODA, the Division of Labor Standards Enforcement (DLSE) will have the court

enter the ODA as a j udgment aga inst the employer. This judgment has the same force and effect as any

other money judgm ent entered by the court. Consequen tly, you may either try to collect the judgm ent yourself

or you can ass ign it to DLSE.

10. Q. What can I do if my employer retaliates against me because I thought I was misclassified as an

independent contractor and objected to not being paid overtime?

A. If you are an employee and your employer discrim inates or retaliates agains t you in any manner whatsoever,

for example, he d ischarges you because you ques tion him about your employment status, or about not being

paid overtime, or because you file a claim or threaten to file a claim with the Labor Commis sioner, you can

file a discrimination/retaliation complaint with the Labor Com mis sioners Office. In the alternative, you can

file an action in court against your employer. If, on the other hand it is determined that you are in fact an

independent contractor, DLSE cannot assis t you as i t does not have jurisdiction over independentcontractors, and you would have to go to court to enforce your rights.

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