CAMLAW: Complementary and Alternative Medicine Law Blog : Complementary, Alternative, & Integrative Medicine Law, Regulation, Ethics & Policy (Alternative and Complementary Medicine, Medical Spa Information, Holistic Health Attorney, and Legal Resources)

This post deals with the labor law issues.

The question of whether to classify a worker as an employee vs. independent contractor depends on both federal and state law.

Under federal law, the Internal Revenue Service (IRS) notes that an employer must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee, but not on payments to independent contractors.

   

         To determine whether the person providing service is an employee or an independent contractor, the IRS looks to the degree of control vs. independence that the person has in the workplace. The IRS looks to three types of control or independence:[1]

 

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? Behavioral control includes:

·         Type of instructions given

·         Degree of instruction

·         Evaluation systems

·         Training

For example: “The more detailed the instructions, the more control the business exercises over the worker. More detailed instructions indicate that the worker is an employee.  Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.”

2.      Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) Financial control factors include:

·         Significant investment

·         Unreimbursed expenses

·         Opportunity for profit or loss

·         Services available to the market

·         Method of payment

For example, an independent contractor often has: a significant investment in the equipment he or she uses in working for someone else; unreimbursed expenses; the opportunity to make a profit or loss; freedom to seek other business opportunities; and a flat fee rather than a regular wage.

3.      Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? The factors for type of relationship between the parties include:

·         Written contracts

·         Employee benefits

·         Permanency of the relationship

·         Services provided as key activity of the business

For example, the written contract may specify the relationship; independent contractors typically do not have written contracts or employee benefits, and are hired for a definite period of time without the expectancy of an indefinite work relationship; similarly, if the worker provides services that are not a key aspect of the business, it is more likely the business does not have control over the worker’s activities and that the worker is therefore an independent contractor.

            To understand how these various factors can be applied to different situations, one should ask a task accountant or labor law attorney familiar with court cases interpreting these rules.

            State law often has variations on these tests and may in fact impose more stringent requirements. The penalties for misclassifying an employee as an independent contractor can be severe. Therefore, it is important to check with state law, and many businesses err on the side of caution.

            In California, for example, the Department of Industrial Relations (“DIR”) warns that employers:

oftentimes improperly classify their employees as independent contractors so that they, the employer, do not have to pay payroll taxes, the minimum wage or overtime, comply with other wage and hour law requirements 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’ compensation insurance, and are not liable for payments under unemployment insurance, disability insurance, or social security.

            The situation in California is complex because multiple agencies are involved in the determination of worker status. These include:

The Employment Development Department (EDD), which is concerned with employment-related taxes, and the Division of Labor Standards Enforcement (DLSE), which is concerned with whether the wage, hour and workers’ compensation insurance laws apply. There are other agencies, such as the Franchise Tax Board (FTB), Division of Workers’ Compensation (DWC), and the Contractors State Licensing Board (CSLB), that also have regulations or requirements concerning independent contractors. Since different laws may be involved in a particular situation such as a termination of employment, it is possible that the same individual may be considered an employee for purposes of one law and an independent contractor under another law.

            California has a lengthy and complex definition of employee in its Labor Code, sections 3350-3371. Section 3353 defines “independent contractor” as:

any 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.

Section 3357 then states that any “person rendering service for another,” who does not fit the above definition of independent contractor, is presumed to be an employee.

            Elsewhere, the Labor Code states that to classify a worker as an independent contractor[2] requires proof:

(a) That the individual has the right to control and discretion as to the manner of performance of the contract for services in that the result of the work and not the means by which it is accomplished is the primary factor bargained for.

(b) That the individual is customarily engaged in an independently established business.  

(c) That the individual's independent contractor status is bona fide and not a subterfuge to avoid employee status.[3]

           

            Not very helpfully, the DIR states that Section 3357 creates a rebuttable presumption that a person is an employee, and that:

the actual determination of whether a worker is an employee or independent contractor depends upon a number of factors, all of which must be considered, and none of which is controlling by itself. Consequently, it is necessary to closely examine the facts of each service relationship and then apply the law to those facts.

            For most matters, this means applying the "multi-factor" or the "economic realities" test[4] of which the most significant factor is “whether the person to whom service 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 means in which it is performed.” Additional factors include:

1.      Whether the person performing services 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 business 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 employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;

5.      Whether the service rendered requires a special skill;

6.      The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;

7.      The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;

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

9.      The degree of permanence of the working relationship;

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

11. Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.

            The DIR notes that:

Even where there is an absence of control over work details, an employer-employee relationship will be found if (1) the principal retains pervasive control over the operation as a whole, (2) the worker’s duties are an integral part of the operation, and (3) the nature of the work makes detailed control unnecessary.

           

            The decision that a worker is an employee imposes obligations on the employer, including the following:

California’s wage and hour laws (e.g., minimum wage, overtime, meal periods and rest breaks, etc.), and anti-discrimination and retaliation laws 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 must go to court to settle their disputes or enforce other rights under their contracts.

Again, it is helpful to have a California labor law attorney review all the obligations of an employer under California law.

 

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[1] The IRS notes: “There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination…. Also, factors which are relevant in one situation may not be relevant in another.” If, after reviewing the three categories of evidence, it is still unclear whether a worker is an employee or an independent contractor, Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF) can be filed with the IRS. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker’s status. Be aware that it can take at least six months to get a determination, but a business that continually hires the same types of workers to perform particular services may want to consider filing the Form SS-8 (PDF).”

[2] California adds a “rebuttable presumption” that “where a worker performs services that require a license pursuant to Business and Professions Code Section 7000, et seq. (i.e., the Contractors’ State License Law) or performs services 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.

[3] Id. “A bona fide independent contractor status is further evidenced by the presence of cumulative factors such as substantial investment other than personal services in the business, holding out to be in business for oneself, bargaining for a contract to complete a specific project for compensation by project rather than by time, control over the time and place the work is performed, supplying the tools or instrumentalities used in the work other than tools and instrumentalities normally and customarily provided by employees, hiring employees, performing work that is not ordinarily in the course of the principal's work, performing work that requires a particular skill, holding a license pursuant to the Business and Professions Code, the intent by the parties that the work relationship is of an independent contractor status, or that the relationship is not severable or terminable at will by the principal but gives rise to an action for breach of contract.”

[4] This test was adopted by the California Supreme Court in the case of S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341.

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