Employee Classification

One of the most complicated areas of employment law in California just got a lot more expensive. The California Labor Commissioner recently cited Michael Mello, owner of Sacramento based Green Valley Landscaping Services, $664,764.00 for violations relating to misclassification of independent contractors.

Specifically, the fines were for minimum wage violations, unpaid overtime, and failure to provide itemized wage statements as required under California law; outlined on the Department of Industrial Relations website.

This recent ruling by the Commission stresses the importance of proper classification of employees and independent contractors.

In making her determination, Commissioner Julie A. Su stated, “Misclassification of employees as independent contractors harms legitimate businesses and cheats the hardworking men and women of California who are entitled to a just day’s pay for a hard day’s work. This is a tactic by unscrupulous employers to deny workers’ pay for every regular hour worked and overtime. Misclassification is also used to cut costs and to underbid projects, making it extremely difficult for legitimate contractors to compete.”

Commissioner Su’s stance is reflected in the Department of Industrial Relation’s formation of California’s Labor Enforcement Task Force (LETF), aimed at combating “the underground economy in California to create an environment where legitimate businesses can thrive. In this joint effort between state agencies and affected communities, information and resources are shared to ensure hard-working, compliant business owners and their employees have an opportunity for healthy competition,” according to the Task Force’s website.

The underground economy is described on the site as “any business who deals in cash and/or uses other schemes to cover up its true tax liability from government licensing, regulatory, and taxing agencies (sic).” Such “schemes” include tax evasion, tax fraud, cash pay, tax gaps, wage theft, payments under-the-table, and off-the-books.

The problem with the classification of employees in California is that determination of an employee’s true status is not subject to a bright-line rule, which could allow different agencies to reach different conclusions.

Different definitions for different agencies

According to the State’s website, “The state agencies most involved with the determination of independent contractor status are the Employment Development Department (EDD), which is concerned with employment-related taxes, and the Division of Labor Standards Enforcement (DLSE), which is concerned with whether the wage, hour and workers’ compensation insurance laws apply. There are other agencies, such as the Franchise Tax Board (FTB), Division of Workers’ Compensation (DWC), and the Contractors State Licensing Board (CSLB), that also have regulations or requirements concerning independent contractors. Since different laws may be involved in a particular situation such as a termination of employment, it is possible that the same individual may be considered an employee for purposes of one law and an independent contractor under another law. Because the potential liabilities and penalties are significant if an individual is treated as an independent contractor and later found to be an employee, each working relationship should be thoroughly researched and analyzed before it is established.”

So how can you tell if you’re an employee or an independent contractor?

Only through careful analysis of the various factors that have been laid out by regulation and case law. In particular, the case of S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341 outlined an “economic realities” test which provides that the most significant factor to be considered is whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker both as to the work done and the manner and means in which it is performed. The Division of Labor Standards Enforcement (DLSE) assumes everyone is an employee. That assumption can be challenged in individual cases, taking into account the economic realities test along with the following additional factors:

  1. Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
  2. Whether or not the work is a part of the regular business of the principal or alleged employer;
  3. Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
  4. The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
  5. Whether the service rendered requires a special skill;
  6. The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
  7. The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
  8. The length of time for which the services are to be performed;
  9. The degree of permanence of the working relationship;
  10. The method of payment, whether by time or by the job; and
  11. Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.

If you believe that you may have been misclassified as an independent contractor, rather than an employee, resulting in loss of benefits, feel free to contact our office for an in-depth analysis of your particular case and the possible damages you may have suffered as a result therefrom. Our office represents employees individually and in class actions throughout the State of California, and we would be happy to assist you with any questions you may have.