Knowing the law when hiring independent
contractors is a must
East Bay Business Times - September 29, 2006

One of the common questions asked of business owners is whether or not they will have employees. Often times employers will say that they don't anticipate hiring employees, just independent contractors. A seasoned attorney will see this as a potential red flag and delve further into the unknowing assumptions of the client, because labeling an employee as an independent contractor is full of land mines which may not be triggered for some time, leading to very costly remedies, penalties and interest if the relationship is wrongly identified.

Frequently, employers want to create an agreement that simply classifies the worker as an independent contractor. If the worker is truly an independent contractor, then such an agreement is helpful to outline many areas - such as the scope of work, method of payment and structure of payments, how to handle disputes between the parties and whether those disputes should be mediated, the area of work and the location in which the service will be performed.

Other aspects that an independent contractor agreement should address include some deeper areas, such as which entity or person owns the work that is developed, how to handle the proprietary work of the employer or independent contractor and how to handle shared client lists.

These agreements need to be drafted very carefully, and an employer should have them done by an attorney, since any overlooked areas may cause problems down the line. But most importantly, the employer, with counsel, must identify whether the worker is indeed an employee in the eyes of the law before drafting any agreement, as the classification itself does not define the relationship.

So how does an employer identify a true independent contractor versus an employee? What if you, the employer, know the difference between the two classifications, but the relationship changes over time? Why is this such a heated area?

There are various governmental entities such as the California Labor Board and the Department of Labor that oversee this area.

The scrutiny is intense because legally employers should not be able to label employees as independent contractors in order to avoid payment of payroll taxes and triggering all the other protections to which employees would be entitled. The overseeing agencies take these issues very seriously, and will address them even if it is regarding one wrongly classified employee.

Once an independent contractor is identified as an employee, many other laws apply that the employer is assumed to know and adhere to, such as those concerning overtime, breaks, minimum wage, meal periods, and health and safety regulations, as examples. Finding an employer to be in violation of these or other employment laws can compel back pay, penalties and interest in astronomical amounts. Clearly proper initial classification is key to avoiding significant future problems.

Various tests are used to determine whether you have an independent contractor or an employment relationship with a worker. Federal agencies use one type and the California Division of Labor Standards Enforcement uses a combination of the federal tests.

In many of the tests, the most common examination is the "right to control," depending on the amount of control an employer can exercise over a worker. The more control, the more likely the worker is an employee. The factors include the following:

• The extent of employer control over details of work.
• Whether a worker is engaged in a distinct business/occupation.
• In that occupation, is the work usually done under employer direction or by a specialist.
• The skill required for that occupation;
• Does the employer supply the instrumentalities (equipment), tools and workplace.
• Length of time for which worker is employed.
• Method of payment, whether by time worked or the job.
• Is the work a part of the regular business of the employer.
• Do the parties believe they are creating an employer-employee relationship.
• Does the worker do business with others?

These factors are adopted from a California Supreme Court Case, S.G. Borello & Sons, Inc. vs. Dept of Industrial Relations (1989) 48 Cal.3d 341. There is also a broader economic realities test focusing on the worker's economic dependency on the employer and other factors.

If an employer truly has an independent contractor relationship with the worker, the best approach is to create a clear and inclusive written contract, signed by both parties, to preclude any misunderstandings. If there is an employer/employee relationship, the employer should already have a clear policies and procedures manual, but that is another article.

De La Housaye is the founding attorney of De La Housaye & Associates in Walnut Creek . Contact her at delahousayelaw.com or 925-944-3300.

Reprinted with permission from the East Bay Business Times. © 2006. All rights reserved.