Independent Contractors

Seyfarth Synopsis: The California Supreme Court, in Dynamex Operations v. Superior Court, has agreed to address the legal standard for determining whether a worker classified as an independent contractor is really an employee. The Supreme Court’s opinion is expected to be significant for anyone thinking of using independent contractors in California.

The Future of Work: A Surging Demand for Independent Contractors

Recent years have seen tremendous growth in the sharing economy, aka, the “gig economy,” which reflects the technological ability to quickly summon goods or services through a smart phone. While the new economy has grown rapidly, the relevant legal standards have not. Yet business owners continue to invest heavily into business models that have created tens of thousands of flexible jobs for workers classified as independent contractors. In the absence of legislative guidance tailored to the realities of the new economy, California courts and administrative agencies have struggled to apply the law developed during an earlier age.

The new economy is a powerful fact of life. According to Seyfarth’s “Future of Work” Outlook Survey, 45% of respondents expect their company’s demand for independent contractors to grow in the next five years. Companies in the areas of information technology and telecommunications are among those most likely to experience these developments, as opposed to companies in the areas of real estate and consumer staples. (A deeper analysis of our survey’s findings appears here.)

These survey responses provide a valuable snapshot, but employers are likely to change their tune based on the regulatory environment and any significant judicial rulings narrowing the use of independent contractors.

One such potential ruling could come in Dynamex Operations West, Inc. v. Superior Court. The California Supreme Court has agreed to review a Court of Appeal decision that stunned employers by expanding the definition of “employee.” That definition of employee arguably could encompass many individuals traditionally retained as independent contractors.

When determining whether workers were independent contractors, many companies previously considered how much control the company exerted over a worker and how much a worker economically depended on the company. This framework provided some consistency.

Taking a turn, the Court of Appeal in Dynamex adopted the Wage Order’s much-broader definition of “employ,” meaning “to engage, suffer or permit to work.” As a result, the Court of Appeal expanded the meaning of the term “employee,” arguably extending it to nearly every labor relationship a company would be likely to have with an individual. The potential ramifications of such a definition upon the future use of independent contractors cannot be overstated. Indeed, the U.S. Chamber of Commerce and California Chamber of Commerce have both warned that a decision to affirm the lower court’s expansive ruling “would effectively eliminate independent contractor status for any use in California.”

Consequences of Misclassification

Making it more difficult to properly classify an independent contractor would only increase the risks of costly litigation. By now, readers should know that misclassifying California employees as contractors has dire consequences, including statutory penalties of $5,000 to $15,000 for each “willful” violation. Failing to properly classify workers can create liability for back wages, penalties, fines, and the assessment of back taxes. Additional exposure can also arise when misclassified workers, who would otherwise be entitled to employee benefits, have not received those benefits. California state agencies in search of employment-tax revenues have increased their enforcement efforts, including audits. In fact, the California Labor and Workforce Development Agency has agreed to jointly investigate independent contractor misclassification with the IRS, reflecting both agencies’ desire to increase enforcement.

California employers with operations in other states should also note that increased misclassification enforcement is not peculiar to the Golden State. In July 2015, the U.S. Department of Labor’s Wage and Hour Division issued its Administrator’s Interpretation, concluding that “most workers are employees under the FLSA” in part due to the “expansive definition of ‘employ’ under the FLSA”; we previously observed this position to be an “unapologetic effort to restrict the use of independent contractors.” Today, it still remains to be seen whether the Trump Administration will redirect federal enforcement priorities away from independent contractor issues. But even if the federal government backs off of these issues, there is no indication that state governments and the ubiquitous plaintiffs’ bar will stop aggressively challenging independent-contractor classifications.

Scrutinize Your Existing Relationships with Independent Contractors

As always, employers should remain vigilant for new legal developments and should consult their employment counsel to scrutinize existing relationships with independent contractors.

Edited by Michael G. Cross.

in·de·pen·dent adjective \ˌin-də-ˈpen-dənt\

1: not dependent: as a (1) : not subject to control by others

con·trac·tor noun \1 usually ˈkän-ˌtrak-tər, 2 usually kən-ˈ\

1: one that contracts or is party to a contract: as a : one that contracts to perform work or provide supplies

Two words with straightforward meanings; at least one would think. But put those words together—“independent contractor”—and their meaning in the workplace context is often anything but clear. Applying the independent contractor label carelessly can lead to a world of trouble.

Whether workers are properly designated as independent contractors, rather than employees, depends on a host of factors. The pivotal factor is whether the principal controls the manner and means of accomplishing the desired result.

Manner and Means: Determining The Level Of Control Exerted

If I offered to pay you to deliver something to a particular place before a particular time––say the ceremonial ball to Times Square by New Year’s Eve 2014––but I gave you no additional instructions, you would be free to choose the manner and means you used to get the ball there. Your route could be circuitous, or direct, as long as the ball arrived at the location before the deadline. You could mail it, carry it on a bus, drive it by car, fly it in a plane, or take it by boat.  You could, theoretically at least, hire a mule team to take you and the ball to New York. Or, you could avoid the hassle altogether and pay a friend to do it. Continue Reading Blurred Lines: When Manner Meets Means

Say most of your company’s workers are employees, but for certain types of work you bring in independent contractors.  You have been doing this for years, and everybody in your industry handles this kind of work the same way.  You have nothing to worry about, right?

Not necessarily.  Employers use independent contractors instead of employees for a variety of reasons and under a variety of circumstances.  The decision to use independent contractors has never been without risk, including the risk of class action lawsuits.  However, the stakes in California for misclassifying independent contractors were raised significantly when new Labor Code sections 226.8 and 2753 became effective on January 1, 2012.  In addition to possibly having to pay the worker as an employee for past labor (including paying back employment taxes and maybe overtime wages), you now have to be concerned about the potential for additional civil penalties.

Willful Misclassification:  California Labor Code Section 226.8 makes it unlawful to “willfully” misclassify individuals as independent contractors.  “Willful misclassification” means avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor. This section also makes it unlawful to charge a willfully-misclassified contractor a fee or to make any deductions from compensation for any purpose, including for goods, materials, space rental, services, government licenses, repairs, equipment maintenance, or fines.

  • What are the consequences?  The penalties for violations of Section 226.8 are steep, ranging from $5,000 to $15,000 per violation (as determined by a court or the Labor and Workforce Development Agency (“LWDA”)), in addition to any other fines or penalties permitted by law.  But that’s not all.  If a court or the LWDA finds that the employer has engaged or is engaging in a “pattern and practice” of violating Section 226.8, the employer is subject to a civil penalty of not less than $10,000 and not more than $25,000 per violation.  It is not difficult to see how these penalties can add up very quickly. Continue Reading Employee or Independent Contractor? The Risks of Making A Wrong Decision Grow