Employer’s Classification of Workers
Businesses in California can be faced with a variety of legal issues when hiring workers to assist with the maintenance and growth of business operations. In an effort to avoid the wage reporting requirements, payroll tax commitments, and other legal obligations associated with true employees, businesses may seek to hire independent contractors to perform certain types of work for the business. When doing so, a business must exercise care in determining how it classifies its workers. Even when one thinks they are engaging the services of independent contractors, California law may dictate otherwise.
Generally speaking, whether a worker is an employee or an independent contractor depends on the application of the factors contained in the California common law of employment as well as certain statutory provisions. The basic test for determining whether a worker is an independent contractor or an employee is: whether the principal has the right to direct and control the manner and means by which the work is performed. When the principal has the "right of control," the worker will be an employee even if the principal never actually exercises the control. If the principal does not have the right of direction and control, the worker will generally be an independent contractor.
Businesses must understand that even if there is a written independent contractor agreement in place with a worker, it does not necessarily mean that the worker is an independent contractor according to the law. Even the most well drafted independent contractor agreement will not insulate businesses from liability for failing to properly classify the worker if a worker is deemed an employee by law. Misclassification of employees as independent contractors is an issue that is litigated often. If the workers engaged to assist a business are truly employees by law, the failure to properly treat them as employees could result in financial penalties for the business and could expose the business to legal action.
The California Employment Development Department (“EDD”) website is a valuable resource and businesses should consult it often to ensure they are conducting their relationships with business workers appropriately. For example:
- The EDD publishes information describing the various tests under which the independent contractor relationship is analyzed in the Employment Determination Guide (DE 38) which can be found online at: http://www.edd.ca.gov/pdf_pub_ctr/de38.pdf.
- Detailed information regarding employee and independent contractor reporting requirements is contained in latest revision to the California Employer’s Guide (DE 44) on the EDD website at: http://www.edd.ca.gov/pdf_pub_ctr/de44.pdf.
- Payroll tax forms and other helpful publications for businesses can be found on the EDD website at: http://www.edd.ca.gov/Payroll_Taxes/Forms_and_Publications.htm.
California labor and employment laws are constantly evolving. Businesses should be active in staying abreast of their legal obligations toward workers. The attorneys at Schwartz Semerdjian are available to assist California businesses with employment law issues as well as all types of legal issues that businesses face on a day to day basis.