Wednesday, January 12, 2011

Employee or Independent Contractor?


It’s a new year, and both the Department of Labor (DOL) and the IRS are intent on catching employee misclassification, that is whether a given person is an independent contractor and thus exempt from overtime and other hourly wage rules, or an employee.  This is a landmine of an area – particularly since slightly different tests are used by the IRS, under federal anti-discrimination laws and by the EEOC, under the federal Fair Labor Standards Act, and under California state law. 

In light of this, employers need to be meticulous about keeping records when interacting with independent contractors – make sure to keep itemized receipts for all work and expense reimbursements, and have signed contracts clearly laying out the term and extent of the project for which the independent contractor has been retained.  While each different entity and jurisdiction looks for something different, in all cases it comes down to a factual analysis that often has to meet the “pornography” test – you’ll know employment when you see it.  However, the courts typically focus on the following areas:

·         What degree of control does the employer have over work, and who exercises that control?
·         What is each party's level of loss in the relationship?
·         Who has paid for materials, supplies, and/or equipment?
·         What type of skill is required for work?
·         Is there a degree of permanence?
·         Is the worker an integral part of the business?

California Labor Code §2750.5 states that proof of independent contractor status includes the following factors:

    1. That the individual has the right to control and discretion as to the manner of performance of the contract for services in that the result of the work and not the means by which it is accomplished is the primary factor bargained for.

    2. That the individual is customarily engaged in an independently established business.

    3. That the individual’s independent contractor’s status is bona fide and not a subterfuge to avoid employee status.  A bona fide independent contractor status is further evidenced by the presence of cumulative factors such as substantial investment other then personal services in the business, holding out to be in business for oneself, bargaining for a contract to complete a specific project for compensation by project rather than by time, control over the time and place the work is performed, supplying the tools or instrumentalities used in the work other then the tools and instrumentalities normally and customarily provided by the employees, hiring employees, performing work that is not ordinarily in the course of the principal’s work, performing work that requires a particular skill, holding a license pursuant to the Business and Professions Code, the intent of the parties that the work relationship is of an independent contractor status, or that the relationship is not severable or terminable at will by the principal but gives rise to an action of breach of contract.

The language in subsection (c) somewhat mirrors the EEOC’s nonexhaustive sixteen factors under Title VII and other federal antidiscrimination laws:

·         The employer controls when/where/how the worker performs the job;
·         The work does not require a high level of skill or expertise;
·         The employer furnishes the tools, materials, and equipment;
·         The work is performed on the employer's premises;
·         There is a continuing relationship between the worker and the employer;
·         The employer has the right to assign additional projects to the worker;
·         The employer sets the hours of work and the duration of the job;
·         The worker is paid by the hour, week, or month rather than the job;
·         The worker does not hire and pay assistants;
·         The work performed by the worker is part of employer's regular business;
·         The employer is in business;
·         The worker is not engaged in his/her own distinct occupation or business;
·         The employer provides benefits such as health insurance or WC;
·         The employer withholds payroll taxes;
·         The employer can discharge the worker;
·         The worker and the employer believe that they have an employer-employee relationship.

Both the FLSA and the IRS use slightly simpler tests.  Under the FLAS, an “economic realities” approach is used – does the individual seem to be financially tied to the putative employer?  Specific elements include:

·         The degree of control exercised by the alleged employer;
·         The extent of the relative investments of the putative employee and employer;
·         The degree to which the alleged employee's opportunity for profit or loss is determined by the employer;
·         The skill and initiative required in performing the job;
·         The permanency of the relationship;
·         The degree to which the service is an integral part of the employer's business.

The IRS uses an 11 factor test, looking at three specific elements of the employment relationship:

Behavioral Control

·         Instructions the business gives the worker;
·         Training the business gives the worker.

Financial Control

·         The extent to which the worker has unreimbursed business expenses;
·         The extent of the worker's investment;
·         The extent to which the worker makes services available to the relevant market
·         How the business pays the worker;
·         The extent to which the worker can realize a profit or loss.

Type of Relationship

·         Written contracts describing the relationship the parties intended to create;
·         Whether the business provides the worker with employee-type benefits;
·         The permanency of the relationship;
·         The extent to which services performed by the worker are a key aspect of the regular business of the company.

Employers should thus be extra mindful of these various tests when classifying an individual as an independent contractor especially since the DOL and IRS are on cracking down on employers who misclassify their workers.

JAllan

Copyright 2011: FSK Publishing all Rights Reserved DISCLAIMER: The information on this blog is for general information purposes only and should not be construed to be formal legal advice nor should it be construed to create a lawyer/client relationship between the authors of any information on the blog and any individual who chooses to view this blog. Anyone accessing this blog is encouraged to seek independent counsel for any desired legal advice.

Tuesday, January 4, 2011

Litigation Is Similar To Democracy


Litigation is similar to democracy as defined by Winston Churchill. To paraphrase, the great man famously said that democracy is the worst form of government devised by the mind of man … except whatever is second. Litigation is similar. It is terribly inefficient, costly, uncertain and frustrating but so far we have yet to find a more just way of resolving intractable disputes.  Sometimes an employer is given no choice but to litigate and ultimately try its case.

An example of this is found in the recent case of Urga v Redlands Community Hospital, which was tried to a jury in San Bernardino County Superior Court in July 2010. Urga and others in this class action contended that in 1999 Redlands Community Hospital adopted a new program in which its twelve hour shift employees would start receiving overtime for shifts lasting more than eight hours.  The new program was prompted by a change in the law on January 1, 2000 requiring overtime pay after eight hours.  Previously employees working overtime were paid straight time not time and a half.

In late 2004, three employees of the hospital filed a class action suit, alleging that the hospital had failed to pay overtime properly for the class certified period of 2000 to June 2007 and the three plaintiffs were certified by the court as representatives of all hospital employees similarly situated during that period. The plaintiffs argued that Redlands never paid the overtime properly and the defense argued Redlands had paid properly, but even if it had not the most it owed was $93,000.

In discovery and pleadings the class argued it was entitled to $23,000,000 and the class’s lawyer argued to the jury they should award $51,000,000.

The result?  The jury awarded $93,000.

San Bernardino is a conservative jurisdiction, that is, jury panels tend to be pro-business, anti-give away, and that was a part of the decision to take the case to trial. The trial judge, Janet M. Frangie, was appointed by California governor Gray Davis, a democratic, who is noted for consensus building and for scholarship. The ultimate decision was of course based on the plaintiffs’ pre-trial demand.  The hospital could not negotiate a reasonable settlement in the face of the millions of dollars demanded.

For employers, sometimes trial may be the only answer.

NBoxley