Have You Been Mis-Classified as an Employee or Independent Contractor – The Answer May Be Crucial to the Success of Your Case

When analyzing an employment law case, one must first determine whether the worker was an employee or independent contractor. This is important because in California employment-at-will means that an employer can fire an employee for just about any reason other than one that is prohibited under law. The following is a brief summary of the difference between an independent contractor and employee.  This has been a recent hot topic for many companies such as Uber based in San Francisco.  Our San Francisco Employment Attorneys have been keeping a close eye on these cases as they develop.

Upon termination, one of the most important issues that a worker needs to figure out is whether he was an employee or an independent contractor (“IC”). If it’s questionable, the worker would want to be an IC for three reasons. First, if the worker was an IC, he would be more likely to keep the intellectual property benefits. For example, in a high profile case between two toy-making companies, a high ranking executive was found to be in breach of his duty of loyalty to his former company (Mattel) when he ended up working for its competitor (Bratz). If the executive was (as he argued) an IC, Mattel would not have been able to sue him for breach of duty and an interference of a contractual relationship because he would have only been under contract – which was terminated upon his departure.

Second, a worker would want to be treated as an IC so he can sue for torts (i.e. negligence, breach of contract) purposes because ICs are not limited by workers compensation like employees are. Ultimately, an IC would get a faster and more certain payout, but the payout would be more limited. However, if the company was negligent and the executive got hurt, the IC’s case can be dismissed while the employee’s case would almost certainly result in a judgment for damages.

Third, a worker would want to be categorized as an IC so he cannot be as easily terminated for breach of contract. As an employee, there is no promise that the executive will remain to complete a project. However, as an IC, there’s a contractual agreement that the company must follow or it will be found in breach of contract and must pay damages.
On the other hand, a worker who is categorized as an employee has many advantages. Unlike an IC, an employee will get overtime, minimum wage, benefits like vacation and 401k, workers compensation, unemployment insurance, equal treatment under the law (Title VII, FEHA, ADEA, etc.), unionization rights, and no contractual obligations. There are many tests that courts use to analyze whether an executive was an IC or an employee. The IRS has published its 20 determinative factors and the courts have a long history of observing the Economic Reality Test. See our blogs analyzing Title VII and FEHA.

In a nutshell, the six factors of the Economic Realities Test are (1) Degree of Control over the worker (the more control, the more likely it’s an employee); (2) Deciding the worker’s opportunity for profit or loss (more opportunity, the more it’s like an employee because an IC has a set contract); (3) Worker’s investment in equipment or materials (less invested is an employee); (4) Whether the service rendered required special skill (employees are less skilled than ICs); (5) Continuity and duration (employees have greater duration and permanency while ICs are more seasonal and project-based); and (6) Whether the work is integral to an employer’s business (the more integral to the business, the more it’s an employment). Determining one way or the other before filing the lawsuit is vital in any wrongful termination case.

If you believe that you, or another employee, suffered an employment law matter related to your contract (as an independent contractor) or discrimination or retaliation in the workplace (if you are an employee), prompt action to preserve your rights is vital since the statute of limitation is short. Contact the experienced employment law attorneys at Stephen Danz & Associates for a free no obligation consultation to discuss your circumstances and legal options.