How do I know if I am an independent contractor or employee?
My employer asked me to sign an independent contractor agreement and at the end of each year I get an IRS form 1099 instead of a W-2. Does it mean I am an independent contractor?
The short answer is no. Just because your employer classified you as an independent contractor, it does not mean you are one. In determining your status, California courts and agencies will look at the factual circumstances.
In one of the earlier posts, we discussed the significance of distinction between an independent contractor and employee and how misclassification may expose the employer to liability for unpaid wages. Now, it is important that you understand how to determine your working status.
Unfortunately, there is no universally accepted definition of an independent contractor, and in California, it is highly difficult to determine whether you are an employee or independent contractor. Everything depends on the area of law to be applied. For example, for purposes of taxation, the IRS may apply one test; but when it comes to a wage and hour claim, the Division of Labor Standards Enforcement may apply a different test. Thus, it is possible that you will be classified an employee for purposes of one law and an independent contractor under another.
In the context of wage and hour litigation, we will look at the test applied by the Division of Labor Standards Enforcement (DLSE), because it is the DLSE and the Office of the Labor Commissioner who are responsible for adjudications of wage and hour claims and enforcement of Labor Code statutes.
Relying on California Labor Code section 3357, the DLSE starts with the presumption that the worker is an employee, which means the burden is on the employer to prove that a worker is an independent contractor.
The DLSE applies the “multi-factor” or the “economic realities” test adopted by the California Supreme Court in the case of S. G. Borello & Sons, Inc. v Dept. of Industrial Relations, 48 Cal.3d 341 (1989). Those factors include:
- the employer’s right to discharge at will without a cause;
- whether the employee is engaged in a distinct occupation;
- whether the occupation is the type that is performed with or without supervision;
- whether the employer provides the employee with the instrumentalities and tools to do the work or the pace to work;
- whether the payment is by the time or job;
- whether the work is a part of the regular business of the employer; and
- whether the parties believed they were creating an employee-employer relationship.
In Borello, the Supreme Court explained that “no single factor is determinative; they are intertwined and their weight depends on particular combinations.” However, the Court pointed out that the most significant factor is whether the employer has control, or the right to control, the worker and the manner and means by which the work is performed. Now let’s take a look at each factor individually:
(1) employer’s right to discharge at will without a cause;
If your employer reserves the right to fire you at-will, without a cause, it is likely that you are an employee. A right to fire without a cause is indicative of a large amount of control over the worker. However, a right to terminate must be distinguished from the situation where an employment relationship is terminated because the worker fails to perform under the contract terms. The language defining a relationship as “at-will” generally is included to show that employment relationships were created because an employer can end a working relationship at any time for any, or no reason, and an employee may quit. Unlike an employee, an independent contractor has a legal obligation to complete performance of the contract and may not quite whenever he feels like. If your employer asked you to sign an independent contractor agreement, check if there is any provision under which the employer maintains the right to fire you without a cause.
(2) whether the occupation is the type that is performed with or without supervision;
If your employer tells you when, where, and how to work, then you are an employee. An employer-employee relationship also exists where the employer issues instructions in the form of either manuals or written procedures showing how the desired result is to be achieved. For example, If your employer requires you to perform services in certain order or sequence, it shows that you are not free to follow an independent judgment, but must follow the established routines and schedules of the employer. Further, the submission of regular oral or written reports indicates control since the worker must account for his or her actions. Unlike an employee, an independent contractor decides how to do the job, sets his or her own procedures, and is not supervised. An independent contractor is the master of his or her own time. A person or entity hiring an independent contractor is only interested in the end result.
(3) whether the employer provides the employee with the instrumentalities and tools to do the work or the pace to work;
The furnishing of tools, materials, etc., by the employer indicates control over the worker. However, just because a worker brings his own tools, it does not mean that he is an automatically an independent contractor. In certain occupations and industries, it is common practice for an employee to have his or her own tools, which are usually small hand tools. For example, in one case, a California court held that a cosmetologist who provided scissors and blow dryers was an employee. However, when a worker spends a substantial sum of money on his or her tools and materials, there is an indication of independence.
(4) whether the payment is by the time or job;
If your boss pays you by the hour, week, or month, then you are likely to be an employee. The same is true, if your business and travel expenses are paid by your employer. However, payment on a commission or job basis tends to indicate that the worker is an independent contractor. However, it is crucial to keep in mind that how do you get paid is not a conclusive factor. You can be paid exclusively on a commission basis and still be an employee.
(5) whether the work is a part of the regular business of the employer, or whether the employee is engaged in a distinct occupation;
If the services you provide are so essential to your employer that the success or continuation of his business depends on your performance of those services, then you are likely to have an employee-employer relationship. However, if the performance of your services establishes or affects only your own business reputation, but not the business reputation of your employer, then it is an indication of an independent contractor relationship.
(6) whether the parties believed they were creating an employee-employer relationship.
While in most other areas of law the intention of the parties is generally highly relevant, in the context of wage and hour laws, the parties’ intent to form an independent contractor-employer or an employee-employer relationship is not determinative if other factors indicate that the parties’ actual relationship did not conform to the intended status. Therefore, a worker and employer could both intend to form an independent contractor-employer relationship, but a court could conclude that an employer-employee relationship was formed. Such anomaly is a result of the fact that many individuals do not know how employment determinations are made and believe they are independent contractors because they are told they are.
To better understand how these factors are applied by California courts, consider reading “The Examples and Explanations of Misclassification” post.
If you suspect that your employer misclassified you as an independent contract, it is important that you consult a legal professional who can carefully evaluate your case and determine your correct legal status. If you have any questions regarding this article or would like to schedule a free case evaluation appointment, please contact our San Francisco law office.