Risks Related To Independent Contractor Misclassification Are Rising:  Tips For Limiting Exposure

Topics: Wage & Hour Issues

The federal and state government and plaintiffs’ attorneys are vigorously pursuing claims alleging misclassification of independent contractors.   Government agencies are getting more aggressive with their audits and we are seeing more and more class action lawsuits on the independent contractor classification. 

Moreover, the law applied by governmental entities is shifting.  Rather than focusing on whether the company “controls” the worker, the California Labor Commissioner, as reflected in its recent decision in Uber v. Berwick, and the U.S. Department of Labor, as explained in its July 15 Administrator’s Interpretation, are now focusing on whether the worker is an integral part of the company’s business and whether the worker is truly operating an independent business.  In our view, this shift makes it more difficult to lawfully classify workers as independent contractors.  Adding to this shift by the governmental agencies, the  California Court of Appeal ‘s recent decisions in Dynamex v. Superior Court, in which the court applied a very broad definition of “employ” and “employer” making it virtually impossible to classify a worker as an independent contractor, and Garcia v. Seacon Logix, Inc., holding that “lease agreement” truck drivers are employees and not independent contractors, illustrate that long standing assumptions about what type of workers are independent contractors are not always going to be upheld. 

While the California Supreme Court is reviewing the Dynamex decision, these developments, taken together, show the importance of assessing, and re-assessing, whether workers are properly classified as independent contractors.  With that in mind, here are 12 tips for analyzing the independent contractor issue and reducing your company’s related risk:

• Do not assume all workers may be classified as independent contractors.  Constantly re-assess the classification given the current law and changing work duties and circumstances of the workers;
• Have a written agreement for services with the contractor;
• Allow the contractor to take other jobs - specifically state so in the agreement;
• Do not provide the contractor with tools, equipment or supplies;
• Pay the contractor with results driven compensation - by the job (no guarantees or payments for services not performed and do not pay hourly);
• Limit the term of the contract to no more than 1 year; the less time the better;
• Train your employees to communicate properly with contractors and make sure they are not directing the means of how the work is performed;
• Do not provide the contractor with bonuses or benefits;
• Terminate contractors only for material breach or with 30 days’ notice;
• Review whether the contractor has a separate business license, insurance coverage, and contracts with other entities;
• Do not use contractors to perform functions that are integral to your business or involve direct service to your customers; and
• If you use contractors, try to make sure that you do not have employees performing the exact same function.

Finally, when in doubt, err on the side of employee classification.  We will continue to you keep you posted of important developments in the area of independent contractor classification and they unfold.