I’d like to go through the segregation between an employee and an Independent Contractor. I think it will help give you an idea of what constitutes a independent contractor and what constitutes an employee in California. I say this with a little bit of the caviet. There’s a recent decision in California made with respect to the Uber case. The Uber case basically stated that when companies hire workers and those workers do not hold themselves out with their own business license and/or do not work– and are a key and integral part of the company’s operations then they can be considered employees.
The EDD has been taking a much more aggressive stance towards the classification of independent contractors versus employees. However, this decision even though it’s at the court level is not necessarily how things work at the audit level. The auditors are still comfortable using the multi-factor test which they’ve been accustomed to and there still is some grounds to argue that your workers are independent contractors versus employees.
What this really breaks down to is it breaks down to a number of factors which are supposedly given equal weight although some are weighted more than others as I’ll explain in a minute. It breaks down to this multi-factor test and the lists of are they independent contractors or are they, employees? If you can imagine a system of two columns with pluses or minuses in them. The more factors that you have on your side, the more dispositive it is from an independent contractor versus employee standpoint on which way your workers are going to be classified.
The first factor is instructions. To the extent that you are having to provide instructions to your worker. You give them a task and you explain the ways that the task is supposed to be performed. This is more indicative of an employee relationship than it is an independent contractor relationship. Independent contractors by nature are assigned to do a job and use their own skill and expertise to determine exactly how the job is going to get fulfilled. The next factor that we need to talk about is training. In situations where you have to train your worker, that is indicative of an employee relationship versus an independent contractor relationship.
If you think about it from a hiring perspective if you’re hiring a contractor to do a job you would assume that that person already has the training and the expertise and the knowledge that they need in order to do their position to the best of their ability. If there is training that needs to be performed then presumably that training should be minimal to be training somebody on the systems that the business is used internally. Maybe have some software works if it is not common in the industry or some other factor that is of a minor requirement to their job. If there is major training involved then that would dictate that the worker is probably an employee and not an independent contractor.
Integration, after the Uber decision, this is becoming more and more important. If these services that are being provided by the worker are so integrated into the employer’s operations that the success and continuation of the business depends on the performance of the services it is generally employment. That is one of the really critical factors is, is the worker in question integral to the performance of your business? Of course, that sounds like a term that lawyers use and in fact, it is. There’s a lot of definitions one of those constitutes being integral to the performance of your business.
Generally speaking, if the worker is directly related to how you gain revenue that might be considered integral to your business. One way to defeat that presumption is if it is a general classification of worker that would be expendable. For example, if you are hiring commissioned salespeople on 1099 contracts and those people are interchangeable and expendable then that might be a situation where you would have an independent contractor versus an employee.
Generally speaking, if they’re integral to your operations then they are going to be viewed as an employee over an independent contractor. One of the other key factors of determining whether a worker is an employee or an independent contractor is the requirement that services are rendered personally. A lot of the times, if services needed to be performed by the individual in question, that is an indication that somebody is an employee versus an independent contractor. If those services can be outsourced to others within a person’s organization, then that would be something that would be considered an independent contractor relationship versus an employee relationship.
From a practical standpoint, especially when employing individuals, the services being rendered personally is not one of the major contributing factors. When you’re employing a group of people and there is the opportunity for those people to be substituted in and out, services being rendered personally is a great way to distinguish independent contractors from typical rather than no employees. The hiring of assistants is also a really important factor to consider.
Is if the worker in question needs support personnel to function in their job and you are the person providing that support to the independent contractor, it’s like providing tools, machinery, or equipment. Typically, an independent contractor relationship, the independent contractor would be providing the staff and the tools and everything that they need to do their job function.
When the employer is incurring most of the expenses associated with the independent contractor working, that is a key factor in suggesting employee relationship versus an independent contractor relationship. Set working hours and full-time work are two more factors that are really important. Although, growingly less so, set hours for work is from an independent contractor perspective, if the independent contractor is expected to be somewhere in a particular time at a particular place.
That is usually indicative of an employee relationship versus an independent contractor relationship. What the government is really tracking here with these two with both set hours and full-time work, is the mobility of the contractor to perform services for other people and to basically manage their own operations. Somebody who is stuck in an 8 to 5 or a 9 to 5 type of role, is not really free to manage their own business from an employment perspective.
The government will look at those individuals as being more towards employees because they don’t have the freedom of control. Consequently, those contractors who have no set schedule or who are able to create their own hours, are more akin to being hired to have a job done versus being a physical body in a location. In those situations, having somebody who is hat a [clearing throat] positions, excuse me, of great personal freedom will bolster the argument that their contractors over employees. Continuing a relationship is another factor that would suggest a employee relationship over an independent contractor relationship.
The EDD views independent contractors as having short-term relationships and being on kind of a project by project bases. If you maintain a continuing relationship with somebody, particularly if they’re doing a substantial volume of work, that is suggestive that they are an employee over an independent contractor. In examining their relationship, if you are running into a problem where you have an independent contractor who has been a contractor for multiple years, you really have to look at the volume of work that they’ve been given and the body of what they have accomplished.
That would really give you some pushback with the EDD in terms of framing the relationship between the independent contractor and the client. The EDD is a big stickler for work being done on the premises. In cases where you have a client with a physical location and a contractor is performing work on the premises, that is a really huge factor an independent contractor employee audits.
The reason for that is, again, if the independent contractor has their own location, they’re operating their own business, there’s no need to come to the employer’s location to service their place of business. However, if you’ve got an independent contractor who is a computer technician or is somebody who is in a service field principle, a lot of times, you can overcome the argument that even though that person is onsite, they need to be onsite to adequately do the position that they’ve been contracted for.
In that case, you’re going to have to look at the materials that they’re being given to further flush out whether they are an independent contractor or an employee. Because again, if they’re giving a desk, they’re given a computer, they’re given all the tools that they need to do to do their job, that’s more suggestive of an employee relationship than it is with an independent contractor relationship.
Really the dynamic if the person is coming into the office and the workflow from that perspective is really important to clarify in the independent contractor employee relationship. The order and sequence of job performances for employees that perform services is really important. The order of sequence is indicative of who has control over the relationship. If the employer is setting the manner in which the independent contractor is doing their job, that is more suggestive of a employee relationship than it is of an independent contractor.
Really what the EDD is looking for when it outlines this criteria, is it’s looking for the autonomy of the relationship. How much autonomy does the independent contractor have over the way that they do their work and the order in which it is performed? Now, some things are more sequential than others. Some things are project-based and some things are much more rigid in terms of the task that are expected.
To the extent that you can prove within the relationship that the independent contractor exercises some degree of control or variation over the way that tasks are performed, that is the best way to segregate out that category and put that into your favor. Again, it’s not really the sequence of how things are being performed, but more the autonomy of the person that is actually performing the task.
Reports, payments, and expenses. I may have consolidated the three of these because this has to do with a lot of paper pushing. In general, the EDD likes to think that independent contractors are in the habit of giving paper to their clients. If I am contracted to do a graphic design job, then I am going to submit an invoice for payment. I am also going to submit a report at the end of that project telling you what has been done. The EDD is looking for that type of interaction between independent contractors and their hiring bodies.
They’re looking for evidence that their works being submitted, that their invoices or there are other things that are being given to the client, that would demonstrate the independent contractor relationship. With payments, payments are tricky because if the independent contractor is submitting an invoice for reimbursable expenses then that is something that is indicative of an employee relationship.
However, this can be overcome by a clearly written and defined independent contractor relationship, where you have reimbursable expenses or pastored cost associated with the independent contractor doing their job. In the situation where the cost of the employee doing their job is being– sorry, with the cost of the worker doing their job is being picked up by the company, you want to make sure that those terms are spelled out in some definitive clarity. Otherwise, the EDD is going to tent a clause to find that as an employee relationship versus an independent contractor relationship.
Investment, profit, and loss. The EDD takes the perspective that independent contractors are running their own business. As such, they like to see some “skin in the game.” If the employee or independent contractor is insulated from loss, then that is more indicative of somebody working for somebody, rather than working for themselves. Inherently, businesses have some risks involved and there you perform well you market, you advertise, your profit goes up.
If you’re not doing those functions and you kind of insulated from the risk, then that’s more indicative that you’re an employee of somebody than an independent contractor in nature. The EDD means by investment is it really has to do with the work environment that the independent contractor is working in. If there is a significant investment from the contractor’s perspective, in the environment that they’re actually doing the physical work, that is more indicative of a contractor relationship than it is an employee.
Consequently, if they’re being given everything they have no investor or no stock and their environment that’s usually an employee type of relationship. Working for more than one firm and offering general services to the public. As I said the EDD likes to see independent contractors operating as though many businesses. To the extent that a contractor is locked up in one body of work defeats the presumption that they are an actual contractor and is more akin to an employee.
Now granted depending on the independent contractor and the type of work that they’re doing the project in question may consume the bulk of their time. In which case what the EDD is looking for, the EDD is looking for solid blocks of time with their working for one particular client and then working for somebody else. If you’ve got a situation where you have it, independent contractor who is doing a substantial and sustained law of work over a period of time, it is important to try and break it down a project by project basis so that the EDD can see the gaps in between the work that they’re doing.
If it is a sustained and consistent day in day out bodywork that seemingly never-ending. If there are no gaps within the relationship or at least within the workflow then the EDD is going to continue to try to classify that person as an employee over an independent contractor. Again, really important from the perspective that you segregate out the bodies of work, that you show that the independent contractor is really holding themselves out to more than one person possible. If they’re not really holding themselves out to more than one person you want to be able to explain why and help show the gaps and help show that this is really a project by project basis versus a continuing and sustained workflow that’s being given.
The right to fire and the right quit. California is a right to work state. However, independent contractor relationships are generally governed by contract and are not excitable very easily. When you have a contractor agreement between somebody that is a party to party relationship. It’s usually not the right to be fired and there’s usually not the right to quit absent some financial penalty or some breach of the contract.
This can get particularly difficult when you don’t have an independent contractor set in stone at the beginning of the relationship. What you going to have to argue in those cases of those an oral relationship that formed a contract and that the contractual relationship is essentially binding and there’s some loss or rest associated with that. Absent that you’re going to want to through break down the projects and do little small chunks that would alleviate the need to be fired from. You just simply not going to renew them at the end of their smaller projects versus taking the whole body of work is a bigger one.
Customary in industry and location. The EDD has a set of inherent biases. A government does a lot of employee independent contractors odds and within different industries they feel like they have a good perception on who is an independent contractor and who is an employee. For example, in the construction industry when you’re dealing with a lot of sub-contractors, the EDD is more inclined to know that these people are doing multiple jobs and that they’re holding themselves out as independent contractors.
Consequently, when you have somebody who is working in a restaurant as a bartender or server, those are more employee type of relationships. Even though they may be on a set schedule or have fluctuating hours, that is a consistent body of work. As such, it’s more difficult to overturn the presumption if the industry in question does not have a lot of independent contractors that typically work for it.
If you are in canary industry, you want to get a sense for what the auditors biases are and what they believe. Some auditors will come out and state, “They’re in real estate, they must be independent contractors or they must be employees.” You want to try and flush that out at the beginning of the audit so that you know what the auditors bias are. If you can reveal those biases and ultimately you should be able to overcome the burden of proving that relationship.
Belief in the parties. Belief in the parties is something that is hard done by clients but is something that really doesn’t have much to do with EDDs determination. I want to be clear about this. The EDD takes the position that even if clients and their workers think that they are in an independent contractor relationship that most clients the EDD– most workers the EDD presents do not know what the differences between an independent contractor and an employee.
The burden of employee status is always put on the employer to prove that their workers are not employees but rather independent contractors. They do this for the protection of the worker to make sure that they fall under all of the statutory protections that are associated with being an employee of a company first as being an independent contractor. That and the associated payroll tax burden as far as the EDD is concerned. The belief of the parties isn’t really something that comes into play a whole often or is not something that’s really dispositive in payroll tax audits.
Rather what the important thing is if you have a contract that would substantiate that belief for the parties. You have an independent contractor agreement if it is clear, if it is fairly negotiated and if it is something that is fairly reliable and accurate then that would be a situation where belief in the parties would come into play. But absent any sort of government relationship particularly with lower skilled workers or people who are not highly technical they’re going to presume that there is an employee relationship there over an independent contractor relationship.
The final one is the required level of skill. Independent contractors by nature are highly skilled employees, they are hired to do a particular task because they know how to do it and they know how to do it well. For example, I hire independent contractors to do SEO work or I hire independent contractors to help me build my house or do things that I couldn’t do in a million years.
By nature, the hiring of a worker as an independent contractor applies some level of skill and professionalism. If you are hiring lower-level workers and they do not have skill or a marketable service that doesn’t really put them in the context of an independent contractor unless there are certain situations. If you are dealing with a position that is not super technical or highly motivated you need to sell something about the worker in question that gives them a marketable skill that they could take and use separately in their own business as an independent contractor. That’s really, really important to the designation of an independent contractor.
As you get argue that the worker in question has a particular skill set that is applicable to your business. Then that is a great basis to start an audit on and defeat the presumption that your workers are employees over independent contractors. Just quickly I just want to give you some key questions to think about when determining whether people are independent contractor versus employees. You want to know whether the terms of the relationship between the client and all of their workers is the same or whether it varies from worker to worker. You want to know if the client has the right to supervise the worker.
Does the client care where the services are performed? What course of work is being done over the course of the contract in question? Who establishes the work or studious? Who establishes what conditions there are in? Who is sets the standards for work hours, for holidays, for vacation time? Who sets the standard for quality? Who dictates when the job is done and when it’s not done? What are the objective standards to measure the work that is being performed?
What is the price for the services? Is it being billed on an hourly basis, is it a flat fee? How are the services being billed the client? Is there a paper trail? Are there any voices and involved? Are there things that are typical and customary for somebody running their own business? Does the contractor service other clients as the service is being performed for one client? Is it on a full time or part-time basis? Is it something that is typically performed by an employee or do you need a specialist to come and perform it? From whose account are the workers paid? Where are the expenses paid from? Who picks up the costs associated to the worker? Who supplies the tools and supplies that the worker needs to complete their duties?
Who hires and fires? Is the hiring and firing of the worker contractually bound or is it loose? What happens if the work is unacceptable? Where is the penalty associated with that type of work? Those are all really, really important questions to think about when classifying an employee versus an independent contractor relationship. Again, as a representative or defending yourself in the payroll tax audit, you want to understand the volume of the situation, you want to paint the story, and to tell the story with as many of these factors in the favor of a contract worker versus an employee in order to overcome the burden that payroll taxes are owed to the State of California.
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