See how California law separates independent contractors from employees, including control, pay, benefits, and legal protections. Get the facts on worker classification, misclassification costs, and the legal tests courts and agencies apply.
By Brad Nakase, Attorney
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Hiring independent contractors in California is tricky. Companies have to comply with legal requirements that permit them to categorize a worker as such. The employer may be in violation of the law if they are unable to meet the legal requirements for appropriate employee classification.
The differences between such arrangements may have major consequences for both employees and businesses.
The primary distinctions between an independent contractor and an employee in California will be discussed in this article, along with how to distinguish between the two, why it counts if you are classified incorrectly, and what legal measures you can take to ensure you receive fair compensation.
In general, whether or not the organization contracting for services possesses the authority to control or direct the method and means of labor (tending to imply an employment relationship) distinguishes independent contractors from employees in California.
Or whether the individual offering the services has decided on their own to start their own business (indicating an independent contractor arrangement).
Because the definitions, standards, and elements that the legal system and state and federal agencies use to identify independent contractor or employee status might differ depending on the situation, determining each category can be especially challenging.
For instance, while deciding what kind of IRS tax forms to prepare, an employer must take into account that the IRS uses common law classifications of independent contractor and employee.
In federal cases, a worker’s status is determined by applying what is commonly known as the “economic reality” standard. This classification approach differs somewhat from this method.
However, state law and another set of facts would be taken into consideration when a court is asked to decide whether an employee is entitled to the safeguarding of California’s non-discrimination statutes.
California courts use a different set of criteria in each instance to determine whether a worker is an independent contractor or an employee.
Claims under California’s workers’ compensation statutes are subject to different standards than those under the state’s wage & hour rules. These standards are used to determine the following:
Even if state and federal laws use different particular tests, the components of those tests tend to get confusingly similar to one another.
They might even recur or overlap.
Moreover, it might be highly fact-specific to apply the pertinent criteria in any of these procedures to the specifics of a given instance.
Specific requirements may indicate that a worker in California is an employee, while others may indicate that they are an independent contractor.
For the purposes of filing taxes with the IRS, a worker may even be classified as an independent contractor, but according to California’s wage and hour regulations, they are considered employees.
The recent ruling in Dynamex vs Superior Court (Los Angeles) by the California Supreme Court clarifies some of the ambiguity around the laws and circumstances that are relevant to wage and hour legislation, but it does not address other issues.
1. The Independent Contractor Law of California
Theoretically, independent contractors have greater “freedom” than regular employees.
An independent contractor is typically defined as a person who works for themselves rather than an employer or boss.
In California, independent contractors have historically had the freedom to choose when and where they work, establish their own rates, have several clients, own their own equipment and supplies, offer specialized knowledge or abilities that are not often offered by a business, etc.
To put it another way, an independent contractor is in charge of themselves.
An independent contractor may be hired by a business to complete tasks, but this does not automatically turn the contractor into an employee of the business.
In California, a worker’s level of control over their employer is essential in establishing whether they are an employee or an independent contractor.
The possibility that a worker should be categorized as an employee increases with control. Conversely, the likelihood that an individual is a contractor increases with their level of independence.
2. The drawbacks of Independent Contractors
Nevertheless, independent contractors do not have the same rights as employees under California law, even though they have more control.
They are not eligible for overtime compensation or even the minimum wage, and they can be terminated far more readily. They might have to put in long, continuous shifts without receiving additional pay.
State and federal anti-discrimination laws do not protect independent contractors, and they aren’t eligible for unemployment insurance.
3. Advantages for Employees
On the other side of things, state and federal laws provide protections for employees, including the requirement that they receive no less than the minimum wage, the right to overtime, and eligibility for unemployment insurance.
Additional advantages and safeguards that are accessible to employees and not to independent contractors are:
In essence, it is a grave infringement on your rights to be mistakenly categorized as an independent contractor while carrying out the duties of an employee.
You could lose significant pay as a result of this misclassification, in addition to your fundamental rights as an employee.
You might want to get in touch with one of the knowledgeable employment attorneys right now for a professional consultation if you think your classification as an independent contractor is incorrect.
More than 53 million people are categorized as independent contractors currently. Many of these workers have not been adequately identified.
Why is this the case?
Businesses often try to save cash by misclassifying their workers as independent contractors because they are not required to offer as many perks & protections.
You are most likely an employee if:
Although these are helpful signs, you don’t have to fulfill every need listed above in order to work. To be certain of your classification, please speak with a knowledgeable employment law expert.
You are most likely an independent contractor if:
Please get in touch with a lawyer if you have any issues about whether you are an independent contractor or an employee under California law.
Many companies exploit the vagueness around these two classifications to evade their responsibilities. The line between them is not always clear-cut.
All industries experience independent contractor misclassification. Some are more vulnerable than others.
Certain industries typically have higher levels of independent contractor misclassification. This is according to research on the subject conducted by the National Employment Law Project:
Uber is a driving service located in San Francisco. It is a current and well-known example of the misclassification dispute between employees & independent contractors.
Uber has consistently insisted that its drivers were independent contractors since they operate their own vehicles, choose their own schedules, & are not under supervision while working.
When drivers have contested Uber’s classification, several states have upheld it. Uber drivers have to be considered employees, according to a recent ruling by California’s Labor Commissioner.
Uber gives them equipment (iPhones). Keeps an eye on their performance through customer reviews. Determines fees and rates of pay without consulting the drivers. Didn’t hire the drivers because of any unique or specialized skills.
Misclassified workers may be owed hundreds or thousands of dollars. It is for missed overtime compensation or underpaid minimum wages.
Identifying your actual classification might be challenging. One element does not define whether you are an employee or an independent contractor.
Even when the courts consider all pertinent information to decide on the proper classification, conflicts may still occur.
You can get compensation if you believe that your classification as an independent contractor was incorrect.
The outcome of numerous other legal disputes can be influenced by the subject of whether a worker in California is legally considered an independent contractor or an employee.
As a result, in employment cases, it tends to be the most significant threshold question.
1. California Employer Responsibilities toward Workers
Employers have quite broad responsibilities and duties to workers who are designated as employees under both state and federal law.
These include not discriminating, not retaliating, paying minimum salaries, paying insurance & taxes (social security, unemployment benefits, and workers’ compensation), fulfilling minimum safety standards, & adhering to other regulations like minimum wage, overtime compensation, meal breaks, and rest periods.
2. California Payment Rules for Independent Contractors
According to California’s independent contractor payment regulations, independent contractors are often not eligible for overtime or minimum wage compensation, in contrast to employees.
These contractors are free to directly discuss terms of payment, prevailing rates, and employment agreements with their clients; these parameters often appear in a legally enforceable contract.
3. Compliance for Independent Contractors
It’s vital to remember that California has particular rules pertaining to the categorization of independent contractors, and companies must make sure that these rules are followed to prevent legal problems with worker classification.
For example, independent contractors are liable for all the risks and obligations associated with their work, in addition to paying their personal payroll taxes & self-employment taxes.
Employers may be driven to do one of two actions to avoid the expenses and liabilities that come with becoming an employer.
They are going to either: 1) incorrectly label workers as independent contractors; or 2) attempt to reorganize their employment relations as independent contractor setups by taking complex actions.
4. The Case of Dynamex
In the Dynamex case, the court acknowledged that “where a worker is simply named an independent contractor through a unilateral act of an employing body, but has not autonomously opted to operate in an independently founded company.”
However, there’s a significant chance that the hiring company is trying to use misclassification to avoid the requirements of a relevant wage order.
This has an effect on more than just employers and employees. The misrepresentation of employees as independent contractors causes the state to lose over $7 billion in missing payroll taxes annually, according to the L.A. Times.
Additionally, as the judge in Dynamex pointed out, California’s wage and hour laws are designed to protect the public from having to pay for workers who are forced to work in hazardous or dangerous conditions or receive inadequate pay, in addition to ensuring that workers maintain an elementary decent standard of living.
According to federal law, in accordance with the federal tax code, any company entity hiring a worker must ascertain the scope of the business relationship—whether an independent contractor or an employee—at the outset.
Employers are required by federal tax law to create and give employees an IRS Form W-2.
However, an organization would instead fill out an IRS Form 1099-MISC for independent contractors.
To ascertain whether a person is an employee or an independent contractor, the IRS uses common law criteria.
Examining every piece of evidence regarding the level of authority and autonomy in the connection is required by the common law standard.
The information would be analyzed in relation to the three categories listed below:
1. Behavioral Control
To what degree does the company have the authority? Can it decide what has to be done and how? Whether through training, directions, or other methods.
An individual who must finish tasks in a specific manner at a specific location and time is far more inclined to be an employee.
If the organization receiving services offers training on necessary protocols and techniques, this suggests that the company wants the task completed in a specific manner. Once more, this type of worker is far more likely to be categorized as an employee.
2. Monetary Control
How much authority does the company have over the financial components of an employee’s job?
3. The parties’ relationship
What is the relationship’s perception among the two parties?
4. IRS Form SS-8: Assessing Employment Status
You can ask the IRS to determine if you or your employee should be categorized as W-2 or 1099 for federal income tax withholding purposes if you are unsure.
To accomplish this, submit a request using IRS Form SS-8.
After receiving your Form SS-8, the IRS will choose a technician to examine it, administer the law, and make a determination.
It could take as long as six months.
Employment legislation can be very perplexing. Consulting a lawyer can be a smart choice.
The California Supreme Court’s ruling signaled a significant shift in the way California courts will decide the employee-independent contractor issue in future cases.
In fact, the ruling established a criterion that, in cases filed under the state’s wage orders, assumes that workers are considered employees until the employer can prove otherwise.
Dynamex has multiple offices in California. It is a courier service company.
Dynamex considered its California drivers to be employees until 2004.
But for the purpose of saving money, Dynamex reorganized its connection with drivers in 2004.
After 2004, Dynamex’s strategy was to consider drivers as independent contractors who had to supply their own cars and cover their own transportation costs, such as maintenance, fuel, and liability coverage.
It was nevertheless required of drivers to put on Dynamex shirts and badges, and occasionally to put Dynamex stickers on their cars.
In addition to hiring others and making deliveries for different delivery organizations, drivers were also allowed to select their own itineraries and delivery schedules.
Two of Dynamex’s drivers launched a class-action complaint in 2005, alleging that Dynamex was in violation of the California Labor Code & state wage orders because they and additional drivers were incorrectly designated as independent contractors.
The matter of whether the trial court’s decision to certify the complaint as a class action was appropriate was brought to the California Supreme Court.
The matter at hand addressed whether the trial court had determined the appropriate threshold for categorizing workers as either employees or independent contractors when certifying the matter’s class-action status.
The California Supreme Court ruled that the trial court’s use of the wage orders’ rather expansive employment language was permissible for worker classification.
Wage orders are labor laws. They specify the standards for wages, hours worked, & working conditions in particular industries.
“Constitutionally-authorized, quasi-legal measures that have the effect of law” are what wage orders are.
The Department of Industrial Relations issues wage directives.
The wage orders do not provide a precise description of an independent contractor.
Instead, the directives typically state that, with a few exceptions, they “apply to all individuals working” in the company in question.
Three Interpretations of “Employee” in Wage Orders
“Any individual employed by the employer” is the general definition of an employee. Three distinct meanings of “employ” according to the wage orders were established in a previous case, Martinez versus Combs: (a) to exert control over the hours, wages, or workplace conditions; (b) to endure an obligation (suffer) or permit to labor; or (c) to participate, thereby establishing a common law relationship of employment.
The “suffer or allowed to work” meaning has the ability to completely absorb any independent contractor differentiation, and these different definitions are obviously very broad.
As a result, the court in Dynamex determined that the phrase “suffer or allowed to work” should be understood as a “term of artistic expression that cannot be taken literally” to encompass different kinds of individual workers who have “generally been considered as true independent contractors who are employed only in their own business.”
The assumption that a staff member is an employee could be refuted by the employer in specific situations, which is one reason why the pay order standards cannot be viewed as covering all workers under their purview.
The “ABC” test refers to the conditions under which the employee’s premise can be refuted.
According to the California ABC test:
A wage order isn’t applicable to a California worker who is legally classified as an independent contractor unless the hiring body establishes each of the following:
(A) Both under the terms of the contract for the execution of such work and in reality, the staff member is free from the recruiter’s control and direction in relation to the accomplishment of the task;
(B) The employee completes tasks that are not typically part of the hiring entity’s operations; and
(C) The employee often works in a trade, occupation, or company that is independently established and similar to the work done for the hiring organization.
Thus, in instances brought according to California’s wage orders, the ABC test and presumed existence of a relationship of employment are applicable.
Can the same requirement be applied in such situations? The court in the Dynamex case did not specifically address this issue.
Because of this, it is still unclear whether the ABC test and the assumption of an employment connection might or should be used in situations other than wage orders.
The Dynamex Court did, however, note that the typical common law standard that was previously established in S.G. Borello & Sons versus Department of Industrial Relations isn’t the only appropriate examination when it comes to the subject of whether workers should be classified as independent contractors or employees.
Rather, the Court decided that in order to identify which elements “best accomplish the fundamental legislative meaning and goal of the legal framework at issue, a statutory purpose criterion must be applied.
This provides a solid basis for future courts to conclude that the application of the more expansive “suffer or allowed to work” norm, along with its associated presumption of a relationship of employment, is required by the statutory purposes of California’s Labor Code & Fair Employment and Housing Act.
The FEHA forbids bias in employment practices based on certain characteristics.
FEHA Does Not Protect Independent Contractors
12940–12952 Government Code. Because FEHA’s anti-discrimination laws apply to workers but not to independent contractors, the difference between employees & independent contractors is fundamental.
Under the FEHA, “persons providing services according to a contract” are shielded from discrimination but not from illegal harassment.
An African-American worker at a steel plant won a $25 million judgment award against ArcelorMittal in 2012 for failing to tackle a hostile workplace that included graffiti, vandalism, and racial epithets directed at the employee.
Finding a toy monkey dangling from a rope in his car was one of the situations detailed in the employee’s complaint.
In certain situations, a California court may have to use federal law when attempting to decide the correct categorization of a worker.
The federal Fair Labor Standards Act, or “FLSA,” does not apply the same common law criteria that the IRS uses to assess whether an association is one of employee-employer or independent contractor.
The “Economic Realities” test is the common name for the FLSA test
The elements listed under “Economic Realities” are deemed important:
However, the economic realities assessment does not consider certain circumstances to be relevant.
Factors that receive no weight from the Economic Realities Test:
Far more beneficial to workers than the FLSA, the “Economic Realities” test is seldom utilized there.
In California, the Dynamex ruling is probably going to further tip the scales in favor of workers.
In the same way that there are many situations in which a California employee’s or independent contractor’s classification becomes vital, there are also a number of punishments that an employer may face for misclassification, as well as several ways that an employee who is misclassified may be able to obtain damages.
1. Penalties
Employers are prohibited from intentionally misclassifying a person as an independent contractor according to California Labor Code Section 226.8.
The Labor & Workforce Development Agency may impose a civil penalty of $5k to $15k on an employer who engages in deliberate misclassification.
“Avoiding status as an employee for a person by voluntarily and deliberately misclassifying that worker as an independent contractor” is the definition of “willful misclassification.”
An employer may face civil fines ranging from $10k to $25k per misclassification violation if the Labor & Workforce Development Agency or any court determines that the company was involved in a “convention or practice” of infractions.
Even more severe penalties may be imposed by the IRS.
Anyone who intentionally tries to avoid or evade any tax within the Internal Revenue Code by misclassifying a worker as an independent contractor faces a felony conviction, a fine of up to $100k, and a maximum term of five years in prison.
2. Remedies for employees
Employees who should have been classed as employees but were incorrectly categorized as independent contractors are entitled to reimbursement for all benefits that they would have received if they had been correctly classified.
Back pay and interest may be paid as part of these benefits due to:
Overtime pay, missed lunch breaks, inadequate minimum wage, and/or rest times.
Employees may also be entitled to reimbursement for court expenses and legal fees.
The EDD (Employment Development Department) may nonetheless accept an unemployment insurance claim from a laid-off employee who was mistakenly classified as an independent contractor.
The employee may still be eligible for benefits for unemployment, and the employer may face fines if the EDD finds that the employee was misclassified.
In a similar vein, misclassified employees who sustain an injury at work may still submit a claim to the Department of Industrial Relations Division of Workers’ Compensation.
Employers without insurance may face fines of up to $10k and/or a year in jail.
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