The employer-employee relationship is fraught with legal obligations: workers’ compensation, complex wage and hour rules, paid and unpaid leaves of absence, payroll filings, sexual harassment training, benefits, etc. At times, employers may wish to engage temporary services without some of the entanglements associated with adding employees. Workers, too, may wish to avoid obligations such as tax withholding and exclusive employment relationships. For these and other reasons, employers and workers enter into “independent contractor” relationships.
Businesses, of course, are not self-sufficient. They usually hire consultants and other businesses to perform a wide array of duties. The term “independent contractor” is just another word for “vendor.” The firm that audits the books, the company that takes care of the office plants, and the business that caters the holiday party are all independent contractors in one way or another.
Sometimes, though, employers contract with self-employed individuals. These relationships are scrutinized more carefully than when the vendor is a corporation with its own employees. The government is keenly interested in collecting payroll taxes and withholdings. Therefore, tax authorities are suspicious of independent contractor relationships with self-employed individuals who are not subject to withholding taxes by their employers. Employee advocates, such as plaintiffs’ lawyers and unions, also challenge independent contractor status. These claims may include allegations that misclassified independent contractors were deprived of benefits available to employees, such as medical or pension benefits. Microsoft, for example, faced a huge class action over this issue when programmers classified as independent contractors sought pension benefits that were available only to employees.
Legal restrictions and challenges to employers’ independent contractor classifications have increased in recent years. At the turn of this century, Microsoft faced a huge class action brought by software engineers who claimed that they were incorrectly classified as contractors, resulting in the loss of significant pension and other benefits. Legislation passed in 2001 requires California employers to report independent contractor agreements worth more than $600 to the Employment Development Department. The stated purpose was to help efforts to track down “deadbeat dads” avoiding child support garnishments.
California courts have long used a “right of control” test when evaluating the classification of independent contractors. The Supreme Court’s decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, is considered the seminal case articulating this standard. As explained in an earlier case, Empire Star Mines Co. v. California Employment Commission (1946) 28 Cal.2d 33, the test focuses on “the right to control the manner and means of accomplishing the result desired.” The more the employer specifies the way the job is performed, the more likely the relationship is employer-employee.
Courts consider a number of other factors in addition to the control test. These include whether the relationship may be terminated “at will,”; if the one performing services is engaged in a business distinct from the principal’s; if the work is typically done under the direction of the principal or without supervision; what the required skill is; whether the principal supplies the tools and the worksite; the length of time for which the services are to be performed; the method of payment; and whether or not the parties believe they are creating the relationship of employer-employee.
Two recent court decisions emphasize that the “right of control” test is not dispositive when these and other factors militate in favor of employee status. In Air Couriers Int’l v. EDD (Ct. App., 3d Dist., 5/14/07), the employer challenged the EDD’s ruling that certain delivery drivers were employees, rather than independent contractors. The employer, doing business as Sonic, introduced a great deal of evidence proving that the drivers were autonomous. Among the more significant facts was that the drivers chose whether to accept deliveries. They were free to work for other companies and did so. They supplied their own equipment. They could work longer or shorter hours and take vacations on their own schedule. They determined their own routes and directions to make deliveries. They were paid by the job and could negotiate rates. Most of the workers signed independent contractor agreements. They were not required to wear uniforms or carry Sonic identification, though some did so to gain access to secure buildings or airports.
The EDD, however, introduced sufficient evidence for the court to affirm the judgment under the deferential “substantial evidence” standard of review. The drivers worked regular schedules. In practice, they did not turn down many deliveries. Drivers during certain periods did not sign independent contractor agreements, or were not aware that they were so classified. Some drivers received training from Sonic, including a video and riding with other drivers. Drivers did not employ others to help. Some did not have any business relationship other than their arrangement with Sonic. They did not have their own business licenses or other indicia of private businesses.
The court of appeal therefore upheld the trial court’s determination that the drivers were employees wrongly classified as independent contractors. The court rejected Sonic’s argument that the autonomy of the drivers overcame the other factors supporting employee status. The court emphasized that the delivery driver job was so simple that there was little need for significant control over the manner or means of taking a package from point A to point B. The court also found relevant that the drivers were not engaged in a business distinct from Sonic’s, that they did not invest in significant tools or equipment, that most did not carry on a delivery business for other companies, and that most of the drivers testified that they had worked for Sonic for years.
The court in Air Couriers reached the same result as the court of appeal in JKH Enterprises Inc. v. Department of Industrial Relations (2006) 142 Cal.App.4th 1046, another delivery driver case. decided last year. This one involved an appeal of a stop- work order because JKH did not carry workers’ compensation insurance for its delivery drivers, who were classified as independent contractors. The court’s analysis, while similar to the Air Couriers court, merits a separate discussion. The evidence of JKH exercising any control was even more scant than in Air Couriers. As in Air Couriers, the JKH court dismissed the company’s lack of control as inherent in the simplicity of the delivery driver job. The court in JKH also emphasized that its delivery drivers were “the integral heart of JKH’s courier service business,” in essence, delivering packages for a fee. The courts’ approaches also differed because of the contexts in which they respectively arose. The court in JKH heavily relied on Borello, emphasizing that the California Supreme Court’s consideration of numerous factors other than control was particularly appropriate in the context of workers’ compensation benefits. In contrast, the court in Air Couriers first analyzed whether the standards articulated in Borello should apply outside of the workers’ compensation context. Ultimately, the court found the Supreme Court’s analysis in Borello to be essentially the same as the standard used in prior opinions decided outside of the workers’ compensation context.
JKH and Air Couriers present additional challenges for employers in the already unfriendly territory of employment law. These opinions teach us that over-reliance on control is dangerous when the work is simple to perform. In evaluating the relevant factors, employers should remember that nominally independent contractors generating the company’s revenue are more likely to be deemed employees. The length of time that the “contractor” relationship persists is important as well. The labels, the well-drafted agreements, the parties’ intentions, and the evidence of the workers’ autonomy may all be swept aside by an agency or court.
California’s EDD posts a worksheet on its website (www.edd.ca.gov) that employers may use to analyze whether an individual should be considered an independent contractor or an employee. The EDD also maintains a list of the relevant factors and how they have been applied in a variety of contexts. California employers who have questions after completing the worksheet may contact Taxpayer Education and Assistance (TEA) for consultation and advice by calling (888) 745-3886. Employers also may file a Determination of Employment Work Status (form DE 1870) with the EDD. The information provided on form DE 1870 then becomes the basis for a ruling from the EDD on whether the relationship is one of independent contractor or employment. Of course, employers should carefully consider the risks of an adverse ruling when requesting such a determination.
Finally, for those employers who decide to classify workers as independent contractors, the EDD’s website also contains instructions on how, when, and what information must be reported to the EDD when an independent contractor relationship is established. (Form DE 542 is used for this purpose.) Of course, employers must also consider other jurisdictions when classifying independent contractors. The IRS uses a different standard than the state in determining whether an employment relationship exists. Multi-state employers also must consider the laws of other jurisdictions when classifying independent contractors. California’s “right to control” test is not universally applied in other states.