• Marc Kroop

Independent Contractor Agreements And The Risk of Employee Misclassification

A business may regularly hire independent contractors to assist with functions that fall outside of the business's core business operations. For example, a business may hire an outside contractor to assist with IT issues, janitorial duties, landscaping, AC/Heating, construction accounting, legal or other areas of operation outside of the company's core business. Small businesses that maintain limited staff and management or may have limited financial resources, may find it beneficial to have independent contractors perform most or all of these types of functions. There is nothing inherently problematic with a business hiring outside contractors to assist with functions that do not relate to a company's core business.


However, when companies begin hiring independent contractors to assist with duties related to core business functions, then the risk increases substantially that the alleged independent contractor(s) hired by the company may be misclsassified as independent contractors. In these situations, it is often the case that the business should have maintained such individuals as employees.

A business may decide to take the risk of hiring an individual(s) as an independent contractor(s) because that decision can save significant costs for the business with regard to employment taxes, workers compensation insurance, employee benefits, on call time, overtime pay among other significant cost savings.


Often times, we will meet with prospective clients who have signed written independent contractor agreements with a business. The business will then assert that the written independent contractor agreement signed by the individual is clear evidence that the relationship was intended to be an arms length independent contractor relationship. However, a business may be surprised to learn that the written agreement is simply a starting point in the analysis of whether it has properly classified its alleged independent contractor.


To begin with, we have reviewed numerous alleged written independent contractor agreements that on their face include evidence that an employee was misclassified as an independent contractor. Such faulty agreements, often include provisions that assert the relationship between the business and the alleged independent contractor is at-will. Alternatively, the alleged independent contractor agreement will provide that the alleged independent contractor will receive an hourly rate of pay. Some agreements will provide that the alleged independent contractor will be responsible for working certain set hours subject to strict company control. Often these agreements state that the business will provide the tools of employment and pay expenses for the alleged independent contractor. These sorts of independent contractor agreements are generally worthless. These types of provisions in independent contractor agreements indicate an employment relationship exists rather than an independent contractor relationship.


Some alleged independent contractor agreements we have reviewed over the years will include mixed terms. In these agreements, some terms indicate an independent contractor relationship and some terms indicate an employment relationship. In either case, the written independent contractor agreement is only a starting point in the analysis of whether an alleged independent contractor is properly classified.


Generally, the outcome of any determination of whether an independent contractor relationship or employment relationship exists depends on the level of exercise or control the business exerts over the individual. The more control exercised by the business, the less likely the individual will be viewed as a contractor.


The analysis can become more complicated depending on the who is responsible for the analysis and determination of the individual's status. Significantly, every government agency that has an interest in making a determination about the status of an alleged independent contractor has its own test related to independent contractor relationships. Each government agency relies on its own internal rulings to make conclusions about whether a true independent contractor relationship exists. Agencies with an interest in making this determination include the California EDD, the California State Franchise Tax Board, the California Workers Compensation Appeal Board and the IRS.


Generally, these cases will arise in one of two ways. Sometimes, an alleged independent contractor will visit our office to discuss a claim regarding unpaid wages under an alleged written independent contractor agreement. Upon review of the agreement and discussion with the client, we will inform the potential client that they are likely misclassified as an independent contractor and should have been classified instead as an employee. In these cases, we may file a lawsuit for the client individually. Alternatively, we may file the case as a class action if there are sufficient numbers of employees engaged in similar activities that have also been misclassified as independent contractors.


In other situations, we have seen cases develop when an alleged independent contractor is fired and then decides to file a claim for unemployment benefits with the EDD. Once the alleged independent contractor files a claim for unemployment, the EDD typically makes an initial determination under its rules regarding whether the alleged independent contractor has been misclassified.


If the EDD determines that a misclassification has occurred, then the EDD will then notify all other agencies (State Franchise Tax Board, IRS, WCAB) with an interest in making a similar determination. Each agency that concludes an investigation of the status of the individual may then decide to audit the business to determine how many other employees the business may have misclassified as contractors. An employer who receives a claim for unemployment from an alleged independent contractor may be surprised to learn in a short period of time that it owes hundreds of thousands of dollars in penalties and interest based upon misclassification determinations from various state or federal agencies.


Significantly, California has recently enacted two laws that can cause significant additional liability for employers and individuals who misclassify employees as independent contractors. California Labor Code section 226.8 provides for a penalty up to $25,000 for each willful misclassification. California Labor Code 2753 provides for joint and several liability for company principals that knowingly advise a business to misclassify an individual as a contractor. As a result, a businesses' incorporation will not prevent individual liability for owners, board members, officers or agents that seek to circumvent the law in order to save a business the costs of maintaining employees.


Since 1993, Kroop Labor Law's managing attorney, Marc G. Kroop has successfully protected employee rights. Mr. Kroop has achieved outstanding results in prosecuting independent contractor misclsasification cases on behalf of individuals and class members If you have concerns about your employment rights and believe that you have been misclassified as an independent contractor, Kroop Labor Law provides you with a direct line to counsel (925) 989-8264. Alternatively, you may email us and we will provide you with an immediate written response to your concerns. info@krooplaborlaw.com




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