Independent Contractor vs. Employee Classification: Where Does Your Business Stand?

1. "Supreme Court Shockwaves Rocking the Independent Contractor and De Minimis Terrain: Where Does Your Business Stand?" Presented by Roxana E. Verano, Esq. and Kristina Kourasis, Esq. LANDEGGER BARON LAW GROUP, ALCExclusively Representing Employers Employment Law, Advice, Litigation and Solutions

2. Introduction • This presentation discusses how to properly classify workers as independent contractors vs. employees. • Specifically, this presentation covers: • The difference between independent contractors and employees. • The tests used to determine independent contractor status. • The benefits of using independent contractors. • The consequences of misclassifying employees as independent contractors. • Best practices and recent trends.

3. What Is an Independent Contractor?

4. What Is an Independent Contractor? Generally, an independent contractor is a worker who: • Offers their services to the public for a fee. • Is not economically dependent on any single company. • Is not an employee. • An Independent Contractor is “any person who renders service for a specified recompense for a specified result, under the control of his principal as to the result of his work only and not as to the means by which such result is accomplished.” (Labor Code §3353.)

5. What Is an Independent Contractor? (cont'd) An independent contractor typically: • Charges a fee for their services. • Is engaged only for the term required to perform a specified service or task. • Retains control over the method and manner of work. • Retains economic independence and is free to offer their services to more than one company. • Is responsible for paying their own income, social security, and Medicare taxes. • Is not covered by most federal, state, or local laws designed to protect employees. The provisions of the California Labor Code do not apply to Independent Contractors (IRS Form 1099).

6. What Is an Independent Contractor? (cont'd) An independent contractor typically does not: • Receive company-sponsored benefits, such as paid vacation, health insurance, or retirement benefits. • Perform the same work as the company’s employees. • Have the “indicia” of an employee, such as company uniforms, name badges, or business cards.

7. Independent Contractor vs. Employee An employee, by comparison, is subject to significant oversight and control by the company and: • Is paid wages and receives company-sponsored benefits. • Is employed for a continuous period and performs whatever tasks the company requires. • Generally pays their income, social security, and Medicare taxes through the amounts their employer is obligated to withhold from their wages. • Is economically dependent on the employer. • Is protected by applicable federal, state, and local employment laws. California Labor Code, Wage Orders, FEHA, etc.

8. Tests for Independent Contractor Status

9. Classification: Overview • Person performing work for another will be presumed to be an Employee • Do not rely on titles/labels to determine employee or independent contractor status. • Simply referring to a worker as an independent contractor, even if they agree to that designation, is not enough. • Classification depends on: • The specific facts/duties of each case. • Application of the appropriate independent contractor tests. • Differences in how courts and government agencies interpret those tests.

10. Tests for Independent Contractor Status • There is no single test to determine independent contractor status for all purposes. • The various tests include: • The Economic Realities Test. • The Control Test. • State law tests, i.e. the California ABC Test. • Familiarize yourself with the different federal and state tests that may apply.

11. Economic Realities Test • Used to assess independent contractor status under the Fair Labor Standards Act (FLSA). • Courts look at the totality of the parties’ relationship and use a balancing test to evaluate various factors, including: • The degree of control the company has over the worker. • The relative investment in facilities. • The worker's opportunity for profit and loss. • The permanency of the parties' relationship. • The skill required. • Whether the worker's services are integral to the company's business.

12. The Control Test: The IRS Standard • Used to determine whether a worker is an employee for federal tax purposes. • Analyzes three aspects of the worker's control or independence: • Behavioral control. • Financial control. • The type of relationship.

13. The Common Law Darden Test Commonly used in the context of Title VII of the Civil Rights Act (Title VII), the Americans with Disabilities Act (ADA), the Age Discrimination in Employment Act (ADEA), the Affordable Care Act (ACA), and the Employee Retirement Income Security Act (ERISA).

14. The Common Law Darden Test (cont’d) The test considers the following factors: • Skill required. • Source of supplies and tools. • Location of the work. • Duration of the relationship between the parties. • The company’s right to assign additional projects to the worker. • Extent of the worker’s discretion over when and how long to work. • Method of payment. • The worker’s role in hiring and paying assistants. • Regular business of the company and whether the work performed is part of that business. • The company’s status as "in business."

15. State Law Tests / California “ABC Test” • State independent contractor tests can impose a more narrow definition than the federal equivalent. • California - DynamexOperations West, Inc. v. Superior Court of Los Angeles- April 30, 2018 • Burden on any entity classifying an individual as an independent contractor of establishing that such classification is proper. • Person performing work for another will be presumed to be an Employee.

16. State Law Tests / California “ABC Test” • Under the ABC test, a worker will be deemed to have been “suffered or permitted to work,” and thus, an employee for wage order purposes, unless the putative employer proves that: • (A) The worker has been and will continue to be free from control or direction over the performance of their work, both under the contract for the performance of the work and in fact. • (B) ) that the worker performs work that is outside the usual course of business of the hiring entity’s business; • (C) The worker is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as the work performed. Note that each of these requirements need to be met in order for the presumption that a worker is an employee to be rebutted, and for a court to recognize that a worker has been properly classified as an independent contractor

17. Benefits of Using Independent Contractors

18. Benefits of Using Independent Contractors Because independent contractors are not employees, companies that use them can avoid certain obligations and expenses, including: • Employment law compliance, including overtime, meal and rest periods, tracking of hours, pay stubs, document retention, etc. • Tax and insurance obligations (federal, state, and local income taxes, Social security and Medicare taxes, federal and state unemployment insurance taxes). • Employee benefits. • Immigration law compliance. • Affordable Care Act (ACA) compliance.

19. Employment Law Compliance Federal and State employment laws that cover employees, but generally not independent contractors, include: • FEHA/CFRA/Wrongful Termination • Fair Labor Standards Act (FLSA). • Title VII of the Civil Rights Act (Title VII). • Equal Pay Act (EPA). • Age Discrimination in Employment (ADEA). • Americans with Disabilities (ADA). • Uniformed Services Employment Reemployment Rights Act (USERRA). • Occupational Safety and Health Act (OSH Act). • Worker Adjustment Retraining Notification Act (WARN). • Family and Medical Leave Act (FMLA). • Employee Retirement Income Security Act (ERISA). • National Labor Relations Act (NLRA).

20. Employee Benefits Companies often provide benefits to their employees that are not available to independent contractors including, for example: • Health insurance, including cafeteria plans. • Retirement or pension plans. • Stock options. • Paid vacations. • Sick days. • Life insurance. • Disability insurance. • Fringe benefits, such as tuition reimbursement.

21. Immigration Law Compliance and Affordable Care Act (ACA) Compliance Employers are not required to: • Verify work authorization (by completing Form I-9) for independent contractors. • Provide coverage under the ACA for independent contractors who do not meet the common law definition of "employee."

22. Consequences of Misclassification

23. Consequences of Misclassification The penalties for misclassification can be serious. If a company misclassifies an employee as an independent contractor, it must ensure compliance going forward and may be liable for: • Back wages, overtime pay, meal and rest period premiums. • Statutory penalties, e.g. Labor Code 203 and 226. • Employee benefits, including stock options, retirement benefits, and health plan coverage (or the value of those benefits). • Disability payments and workers' compensation. • Tax and insurance obligations. • Liquidated damages. • Civil monetary penalties/PAGA penalties.

24. Employment Law Compliance Improperly classifying an employee as an independent contractor could lead to claims for: • Unpaid overtime compensation and reimbursement of work-related expenses. • Reasonable accommodation and return to work benefits under the ADA and its state equivalent FEHA. • Leaves of absence under the FMLA and its state equivalents CFRA. • Plant closure and mass layoff notice and penalties under WARN and its state equivalents. • Discrimination under Title VII, ADEA, FEHA and other local anti-discrimination laws.

25. Targets of Enforcement and Litigation Industries particularly susceptible to regulatory enforcement for independent contractor misclassification include: • Construction. • Transportation and trucking. • Cable companies. • Janitorial services. • Landscaping and nurseries. • Security services. • Nursing. • Child care. • Home health care. • Internet services. • Restaurant and catering services. • Staffing services. • Hotels and motels. • Oil and gas.

26. Best Practices

27. Best Practices To ensure that the independent contractor classification requirements are satisfied: • Careful analysis of the specific facts/duties of the services being provided and application of ABC Test. • Use an independent contractor agreement to establish the terms of the working relationship. • Avoid using former employees as independent contractors and having independent contractors do the same work as employees. • Avoid using independent contractors to perform work that is integral to the business. • Require independent contractors to complete a Form W-9, Request for Taxpayer Identification Number and Certification. • Keep independent contractor files with vendor files, not employee files.

28. Best Practices (cont'd) • Pay contractors by the project or by an agreed-on flat fee at regular intervals, not by the hour, week, or month. • Do not reimburse independent contractors for business expenses. • Do not provide contractors with employee-type benefits like paid vacation, paid holidays, sick leave, and retirement benefits. • Do not schedule hours or days of work for contractors or their employees. • Avoid requiring uniforms, grooming standards, and similar workplace requirements typically imposed on employees. • Issue separate guidelines for independent contractors, vendors, and other third parties instead of providing them with a copy of the employee handbook.

29. Best Practices (cont'd) • Do not invite contractors to employee-only events or meetings. • Do not provide contractors with company business cards. • Do not give independent contractors job titles. • Deal with performance problems as contract modification or breach issues, not as disciplinary issues. Do not conduct performance evaluations for independent contractors. Do not involve Human Resources in the business relationship with independent contractors. • Determine if the company's competitors classify similar workers as employees instead of independent contractors. • Regularly audit the company's independent contractor arrangements and template agreements. • Do not control the details of how the independent contractor performs the work. Focus on the end result rather than the details.

30. Hypotheticals

31. Hypothetical 1 Jan is a graphic designer for Image, Inc., a graphic design company. Jan has excellent credentials and has been a valued Image employee for several years. Upon returning from maternity leave, Jan told her manager that she's decided to stay home with her new baby and two other young children instead of working full time. However, Jan said she would like to work a few hours a week to keep her skills sharp and to earn a small income. Jan's manager believes a few hours a week is better than losing Jan altogether and agrees to hire her as an independent contractor. The manager asks Jan to sign an agreement acknowledging in writing that she is an independent contractor and asks her to set up a business entity, as required by Image's vendor guidelines. Jan establishes an LLC, signs the agreement, and begins working 10 hours per week as a contractor for Image. Both Jan and her manager are happy with the arrangement. ------ Is Jan properly classified as an independent contractor under the FLSA?

32. Answer to Hypothetical 1 Probably not. • The hypothetical does not tell us some important facts, such as whether Jan provides design services for clients other than Image, whether she is paid hourly or on some other basis, and which party (Jan or Image) determined her rate of pay. • However, the fact that Jan now does the same work as a contractor for Image that she once did as its employee seriously undermines her classification as an independent contractor. Employees and independent contractors are generally not interchangeable. In addition, Jan's work as a graphic designer is integral to Image's business, which also suggests an employment relationship may exist.

33. Hypothetical 2 Jane is a certified personal trainer with several years of experience. She teaches individual and group sessions at three different gyms, including Bolt. Bolt is part of a large chain of gyms and a consistent client experience is part of its business model. For that reason, Bolt asks Jane to wear a Bolt nametag and Bolt activewear when she is teaching. Bolt schedules the sessions, handles registration, collects session fees from Bolt members, and pays Jane a flat fee for each session. Jane must commit to at least ten session hours each week and at least four hours every Saturday for consultations scheduled by Bolt. Jane enjoys the flexibility and variety of working at different facilities, but she prefers the arrangement with Bolt because, unlike the other gyms, she is not responsible for administrative tasks such as scheduling and collecting money. Also, Bolt has the best equipment of the three and does not require her to pay rent for the studio space.

34. Hypothetical 2 (cont'd) Recently though, Bolt canceled several of her sessions at the last minute because of low registration numbers. Jane was able to replace some of the lost income by scheduling extra sessions at another gym, but she was not paid for the time she spent at Bolt setting up and putting away equipment in preparation for the sessions Bolt ultimately canceled. When she complained to a fellow trainer, he said Bolt should pay her for that time, even if the sessions were canceled, because she is a Bolt employee. ------ Is Jane’s fellow trainer correct?

35. Answer to Hypothetical 2 Probably. • Many of the facts in this hypothetical suggest an employment relationship exists. For example, Bolt exercises a significant degree of control over Jane’s work, including scheduling sessions and consultations, registering participants, and collecting payment. Bolt requires a minimum number of hours from Jane, which must coincide with Bolt’s session schedule, and requires Jane to wear its branded clothing and nametag. Jane personally performs the work for Bolt and does so at Bolt’s location.

36. Answer to Hypothetical 2 (cont'd) • Jane is paid a flat fee for each session, regardless of the number of participants, and is paid nothing if Bolt decides to cancel a session Jane is scheduled to teach. Also, Jane’s investment is minimal compared to Bolt. Bolt provides the studio space and equipment, and covers costs such as advertising and overhead. • Finally, Jane’s work as a personal trainer may be considered “integral” to Bolt’s physical fitness business.

37. Arbitration Agreements and Waivers of Representative Actions

38. Class Action Waivers- Valid • Epic Systems Corp. v. Lewis – U.S. Supreme Court upheld the use of class and collective action waivers in arbitration agreements. • Employers may condition employment on the employee signing an arbitration agreement that includes a class action waiver. (Note: these class action waivers are not enforceable unless they are part of an arbitration agreement.) • Employers must pay 100% of the arbitrator's fees/costs, which can be thousands of dollars. • Especially expensive numerous individual claims are filed in lieu of filing a class action.

39. Class Action Waivers • Under California law, there is almost no right to appeal an arbitrator's ruling, even if the arbitrator makes erroneous factual or legal findings.  • Arbitration agreements cannot place any limits on an employee's right to bring or join in a PAGA claim. 

40. PAGA Claims- Invalid • PAGA claims are also representative actions. • Arbitration agreements cannot place any limits on an employee's right to bring or join in a PAGA claim, because employee is stepping into the shoes of the State and the State is not a party to the arbitration agreement. • PAGA authorizes penalties of up to $200 per employee, per pay period, for violations of wage and hour laws, including minimum wage, overtime, meal/rest periods, paystub rules, and statutory penalties.

41. PAGA Claims – Invalid • No need to meet class action requirements • Recently, PAGA claims must also be approved by the Court. • End Result: • Employer may find itself defending a PAGA claim in court and individual clams with various arbitrators. • Plaintiff attorneys file one PAGA claim and a separate Class Action in case there is an enforceable arbitration agreement – generally assigned to courtrooms.

42. To Waiver or not to Waiver • Even with a class action waiver, employers continue to face burdensome and expensive PAGA representative claims. • Class action waivers may be beneficial for large companies, because class actions are costly to defend and can result in massive damage awards that may far exceed the penalties available under PAGA– one year vs. four years SOL. • Arbitrators tend to be less likely to issue excessively high monetary awards in employment cases.

43. De Minimis – Troester v. Starbucks

44. Let’s Dive In – Troester: FAQs About De Minimis AFTER Troester • In Troester v. Starbucks Corporation, the California Supreme Court recently held that the federal de minimis doctrine does not apply to claims for unpaid wages under the California Labor Code. • According to this court decision, California employers cannot require employees to work off-the-clock without compensation, even if only for a few minutes. As a follow-up to our recent legal alert we provided in the handout on this case, let’s take a deeper dive into some common questions.

45. FAQs: Length of Time To Clock In and Out? • QUESTION: For locations that have time clocks, what are best practices regarding placement? For example, if there is a short line (even one person) to clock in, should an employer be concerned about the length of time it takes to clock in and out?

46. FAQs: Length of Time To Clock In and Out? • ANSWER: This is a fact-intensive inquiry, and a good subject for review by the employer’s human resources or payroll representatives.  • Troester v. Starbucks is especially critical of activities that occur regularly without compensation. If employees must regularly wait to clock in, or if the clock-in process regularly takes more than an insignificant amount of time without compensation, then compensation in some form should be considered.

47. FAQs: Length of Time To Clock In and Out? • EXAMPLE: For example, at the minimum wage, a wait of 30 seconds per punch could add up to $30 per year, an amount that Starbucks might not consider “trifling.” On the other hand, if more than one person is in line for the time clock only 5 percent of the time, that would likely be acceptable.

48. FAQs: Times Spent Commuting • QUESTION: What about time spent traveling from the parking lot to the clock-in location? • Troester v. Starbucks does not change the normal rules regarding commuting. Time spent commuting is generally not compensable unless the employee is somehow under the control of the employer. There may be site-specific situations where employees who drive to work must park in remote lots and shuttle to the actual work location.

49. FAQs: Times Spent Commuting • Even then, as long as employees are allowed other options (e.g., public transportation, getting dropped off on-site, walking, biking, etc.) there is good legal authority that the time spent traveling from the parking lot to the worksite is noncompensable commute time.

50. FAQs: Auto Clock-In? • QUESTION: Are employers now expected to implement some sort of auto clock-in as soon as employees hit a threshold? • Not necessarily. Troester v. Starbucks doesn’t require employers to be at the cutting edge of technology — that may not even be wise or practical in many industries. For example, if employees use personal devices to clock in and out, that could raise questions about device reimbursement. Nonetheless, implementing technological advances as they become industry standards should be considered.