Characterizing Employees As Independent Contractors Can Be A Disaster For Small Business

Both start ups and established businesses have been hurt by the economic climate in Southern California. One place where a business does not want to cut corners is worker classification.  Improperly classifying an employee as an independent contractor can lead to disaster.  The business may be sued by the worker and may face profound tax liabilities.

 What is an Independent Contractor?

In California the Department of Labor Standards Enforcement starts with the presumption that the worker is an employee. Labor Code Section 3357.   While there are guidelines, there is no set definition of the term independent contractor.

The guidelines distinguishing contractors from employees fall into three categories:

  1. Behavioral:  Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial:  Are the business aspects of the worker’s job controlled by the company? (This includes how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  3. Type of Relationship: Are there written contracts defining the relationship? Will the relationship continue?  Is the work performed a key aspect of the business?

The most important factor is the employer’s right to control the work performed

In the case S.G. Borello & Sons, Inc. v. Department of Industrial Relations the California Supreme Court discussed the relevant factors in determining if an individual is an employee or an independent contractor. The Court said the right to control the manner and means by which the work is to be performed is the most significant factor.

If the worker creates his own schedule, brings his own tools, decides how to approach the work then he may be classified as an independent contractor.  If you can’t answer the previous questions with a yes, your worker is an employee.

What happens if you misclassify an employee as an independent contractor?

Expect to write the IRS and the state a huge check for employment taxes for that worker.  Equally bad the business also is exposed to lawsuits by those workers who claim to be misclassified.  The workers can seek damages for missed breaks and overtime and the law provides that businesses must pay the workers’ attorneys fees as well if they prevail. 

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