Are they really independent contractors?
 Oct. 31, 2013

A common question we receive is, "do we need workers' compensation insurance if we only work with independent contractors?" Answering a question with a question can be annoying, but oftentimes it is the best way to respond to that question. We usually ask back, "what makes you think they are independent contractors?" Organizations may stay away from establishing an employer-employee relationship to:

  • Avoid providing employee benefits
  • Eliminate responsibility for payroll and unemployment taxes
  • Avertlaborlawdisputes
  • Avoid wage and hour claims
  • Eliminate responsibility for workers compensation coverage
  • Distance the company from responsibility for most worker negligence occurrences

Perhaps the real question is, does your company and this individual have an employer-employee relationship? Labor Code section 3357 is the starting point for determining whether or not an employer-employee relationship exists. That section reads as follows:

    Any person rendering service for another, other than as an independent contractor, or unless expressly excluded herein, is presumed to be an employee.

The most common method for skirting the employer-employee relationship is by utilizing independent contractors. The challenge is that there is no set definition of the term "independent contractor". Accordingly, we’re guided by court interpretations, The IRS and regulatory agencies decide if in a particular situation a worker is an employee or independent contractor. Be aware that in most cases state courts almost always start with the presumption that the worker is an employee, placing the burden on the employer to prove otherwise. Even though the IRS may offer guidance that can be helpful in determining independent contractor status, meeting those federal tax guidelines is not a comprehensive defense if you are a California employer or engaged in co-employment, as is the case when you are in a Professional Employer Organization (PEO).

In determining whether a worker is an employee or independent contractor a number of factors are considered, but no single factor is controlling by itself. Consequently, you should closely examine the facts of each work relationship and then apply generally accepted tests. One key test is known as an "economic realities test” as adopted by the California Supreme Court. The economic realities test is also known as the Three Cs, control, consent and consideration.

When applying the economic realities test, the most significant factor to be considered is whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker/contractor both as to the work done and the manner and means in which it is performed.

Additional factors that may be considered depending on the issues involved are:

  • 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. Who 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 that locality, the work is usually done under the direction of the principal or by a specialist without supervision.
  • 7. Does The contracted individual performs this work/service for other companies or solely for your operation?
  • 8. The length of time for which the services are to be performed (consent).
  • 9. The degree of permanence of the working relationship (consent).
  • 10. The method of payment, whether by time or by the job (consideration)

Even if there is an absence of control over work completed, an employer-employee relationship can be found if:

  • 1. The principal retains control over the operation as a whole.
  • 2. The worker’s duties are an integral part of the operation.
  • 3. The nature of the work makes detailed control unnecessary.

Many principals believe that the existence of a contract clarifies every ambiguity. It may not and substantial case law exists to that effect. The existence of a written agreement purporting to establish an independent contractor relationship is not solely determinative and the fact that a worker is issued a 1099 form rather than a W-2 form is also not determinative with respect to independent contractor status.

The use of independent contractors to address a short term need is perhaps warranted for your organization. But make certain you consider the short and long term value of that decision, and ask yourself, are they really independent?

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