Classifying Workers Correctly is a Case-by-Case Challenge

There are economic risks for an employer who misclassifies a worker who should be employed as an independent contractor.  A wide range of California and federal agencies have the power to impose back taxes, interest and penalties upon companies who unsuccessfully attempt the tactic.

California placed greater deterrents on the practice in 2012.  Labor Code sections 226.8 and 2753 permit certain officials or a court to impose civil penalties between $5,000 and $25,000 for each instance of willful misclassification against both employers and any individual adviser (other than a lawyer) who “knowingly advises an employer to treat an individual as an independent contractor to avoid employee status”.

The agency or court directing such payment must also direct the business or person to post a notice on its website for one year, specifying that the company has violated the law, has had to change its business practices in order to cease doing so, and that employees who believe they were also misclassified may contact the Labor and Workforce Development Agency.  See also, “Personal Liability and Mandatory On-Line Flogging for Misclassifying Employees as Independent Contractors.”

Boiled down, employers can impose their oversight and control over an employee’s daily production while independent contractors are, well, independent, free to provide services to the hiring party by any means the contractor chooses.  However, there are never any absolutes.  Determination of “employed” or “contracted” status is an exercise in comparing and balancing many factors, sometimes conflicting, on the degree and manner of control. Two recent California appeals court decisions illustrate how this is always a case-by-case proposition.

In Bain v. Tax Reducers, Inc. (2013) 219 Cal.App.4th 110, the California Court of Appeal found that an accountant working for a tax preparation and bookkeeping firm was an employee and not an independent contractor as the company had classed him. The court noted the firm required the accountant to:

•    attend staff meetings;
•    have his work reviewed before it went to clients;
•    do administrative functions and fill out time sheets like employees did;
•    do work the firm assigned to him; and
•    work the hours the company established.

The court also pointed out that:

•    the accountant had no other clients,
•    he primarily used supplies and equipment provided by the company,
•    the company marketed him as its worker and he did not market himself,
•    he was at-will,
•    he performed a function central to the firm’s services to the public,
•    the firm reimbursed his expenses,
•    he did not invoice the company,
•    he did not use subcontractors or his own employees to do any of the work.

In contrast, in Beaumont-Jacques v. Farmers Group, Inc. (2013) 217 Cal.App.4th 1138, another California Court of Appeal panel found that a district manager for a group of related insurance companies was an independent contractor.  The manager hired agents, who had to be approved by the company, and she trained and motivated the agents to sell the company’s products.  Most importantly, the court found that even though she had to follow the company’s “‘normal business practice’ and ‘goals and objectives,’” the company did not control “to any meaningful degree the means by which [she] performed and accomplished her duties as a district manager.”

The court also observed that the manager:

•    determined her own schedule, including hours, breaks, and vacations;
•    hired and supervised her own staff and withheld taxes for them;
•    she did administrative functions in her own office; and
•    paid her own costs, such as a lease, telephone and office supplies, and deducted them on her tax return, which she filed as an independent contractor.

The court found her properly classified as an independent contractor even though she was required to and did prepare reports and attend meetings of district managers.

As a  relatively few pennies of prevention is clearly more sensible than the many thousands that it may cost to resolve a classification gone wrong, businesses should confirm any contractor relationship is soundly defined and justified as independent in practice. For assistance, please contact attorneys Tim Bowles, Cindy Bamforth or Helena Kobrin.

See also, “Independent Contractors and Employees Avoiding Misclassification of Hired Workers in California.”