Classifying Workers: Are They Employees?
California businesses face a task with potentially costly legal implications when deciding whether to classify workers as employees or independent contractors. Certain businesses may have an economic incentive to classify workers as independent contractors to take advantage of decreased labor costs that result from avoiding tax withholding and the additional legal burdens and benefits that arise from an employer-employee relationship. However, misclassifying workers as independent contractors could result in litigation under federal laws such as the Fair Labor Standards Act (FLSA), as well as state labor laws.
Unfortunately, the path to avoid such litigation is not clearly marked for businesses intending to correctly classify workers. A worker’s true status is generally not informed by how the business prefers to classify a worker nor which classification would be most beneficial to the business; the label the business assigns to a worker holds almost no bearing on the legally correct classification. Instead, courts examine a variety of other factors to determine, within the totality of the circumstances, which classification is correct. The relevant factors are somewhat of a moving target, although a few guideposts do appear.
A set of different legal tests exist that inform the proper classification for, among other things, social security tax purposes, federal income tax purposes, and FLSA requirements. Last year, however, the U.S. Court of Appeals for the Ninth Circuit announced that the most important factor in determining whether a worker is an employee or independent contractor is control. The Appeals Court described a sliding scale between contractor and employee in which the greater the control the employer has over the manner and means of work carried out, the more likely it is that the worker is an employee and not an independent contractor.
More recently, the United States Department of Labor (DOL) issued an Administrator’s Interpretation in July that provides consolidated and revised guidance on the application of the standards for classifying workers as employees or independent contractors under the FLSA. That Interpretation implies that there is an automatic presumption of employee status, meaning all workers will be assumed to be employees unless the business can show sufficient proof to the contrary. The test stated within the Interpretation lists six factors that inform the correct classification: (1) Is the worker an integral part of the employer’s business? (2) Does the worker’s managerial skill affect the worker’s opportunity for profit or loss? (3) How does the worker’s relative investment compare to the employer’s investment? (4) Does the work performed require special skill and initiative? (5) Is the relationship between the worker and the employer permanent or indefinite? (6) What is the nature and degree of the employer’s control?
California businesses should seek guidance from a qualified lawyer to determine the correct hiring classification of workers. If there is a benefit to hiring independent contractors, an experienced attorney can help to ensure contracts are appropriately drafted and working arrangements well understood to conform to the current legal landscape.