So starting with the most basic of inquiries, where does one look for guidance and how does one determine when and if a sales person, an Uber or Lyft driver, or a landscaping expert who works for a person doing business in California on a regular or semi-regular basis, is an employee or an independent contractor? With respect to an independent contractor, an entity would not have to pay employer contributions for state unemployment tax, social security, federal unemployment tax, benefits that “real” employees may be receiving such as health care or other forms of insurance (such as workers’ compensation), and would not have to be concerned with wage and hour laws (overtime) or certain other state tax or related laws.
The answer to this very simple question is most complex, and is the subject of pending cases before the California Labor Commission and other California regulatory agencies, pending litigation in California state courts and Ninth Circuit federal courts. It may involve, with respect to the very same facts relating to the hiring of one single person, at least the application of: (1) the California Common Law test (with respect to income tax withholding, unemployment insurance and disability insurance) with no definitive answer as to which factors recited in the test bears the most weight, although the issue of employer control may be most significant; (2) Section 220 of the Restatement of Agency; (3) the Borello test (derived from a 1989 California Supreme Court decision) (with respect to workers’ compensation, wage and hour laws and the Fair Employment and Housing Act); (4) the Federal Common Law test, not to be confused with the California Common Law test (although there are overlapping factors in the two tests) (with respect to issues relating to federal income taxes, ERISA, immigration laws and federal copyright laws), and (5) the Federal Economic Realities test, which may be applied by the Federal Government in certain circumstances. Shockingly, there is no single binding statute or case law precedent which requires the various tests or factors examined to be interpreted or applied uniformly by the various regulatory agencies or state or federal courts.
For now, practitioners, tax advisors and clients, alike, must not assume that following any given checklist will produce a satisfactory classification determination by regulatory agencies or courts. All concerned must carefully analyze the facts relating to such hirings, determine the driving force to engage a person as an independent contractor and do a qualitative and quantitative analysis of the benefits to be enjoyed as a result of the classification (as contrasted to the possible draconian remedies that may be imposed by regulatory agencies and courts if any of them concludes, for specific or general purposes, that the classification as an independent contractor is wrong). We have yet to fully understand the impact of a negative decision by one regulatory agency on others who also have jurisdiction over the parties, albeit for different purposes, or on courts when reviewing such determinations. Obviously, any decision to pursue an independent contractor classification must be the subject of weighing the various factors applicable under the numerous tests and very carefully drafting contracts designed to satisfy those factors as much as possible. Moreover, counsel and tax advisors should remain on high alert with respect to the many ongoing lawsuits and regulatory cases presently pending. The real message here is to be aware of a rapidly changing landscape, the regulatory agency trend toward disfavoring the independent contractor classification and take very seriously how and when you decide to classify a hire as an independent contractor versus an employee.
To keep up with the views of the California Department of Industrial Relations, go to http://www.dir.ca.gov/dlse/faq_independentcontractor.htm.
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