Employee or Independent Contractor - the Proverbial Tar Baby

There is no way to talk about employment issues without jumping headfirst into the muddy waters of employee versus independent contractor.

To help understand recent developments, a bit of background is in order. 

Historically, there was no issue. Employers paid employees for their time and labor. The amount depended on the relative bargaining power of each and of course was almost always determined by the employer. The employer simply paid a wage as low as possible that would still get people to come and work. And lest you think I’m talking about ancient history, look again at Upton Sinclair’s book, “The Jungle” which was mentioned in a previous article. Those practices were the rule rather than the exception. A worker received pay and that was it! No minimum wage. No overtime. No insurance of any kind. Show up. Do your work. Shut up. Take it or leave it.

We all know that things have changed. Federal and state laws require employers to provide various benefits to employees in addition to requiring the payment of a minimum wage and other compensation. There are even some that argue that the pendulum has swung too far…that all these requirements sometimes make it too costly for employers.

There is no doubt that employers face a lot of different costs, in addition to actual wages. These include FICA (employers portion of social security and Medicare), unemployment insurance, workers’ compensation insurance, health insurance, and overtime pay to name a few.

When you consider that if a person doing work for someone else, or a company is an independent contractor, all these costs go away, it is easy to see why employers would like you to be an independent contractor instead of an employee.

And there is the rub. While in the majority of situations it is easy to determine the difference between an independent contractor and an employee, there are an awful lot of gray areas. And it is in these gray areas that you find both unscrupulous employers trying to “beat” the system, as well as people that in good faith try to figure out on which side of the line they should be.

Because of the gray areas, the courts have been trying to define the differences for a very long time. Almost seventy-five years ago the issue made its way the U.S. Supreme Court. In Board v. Hearst Publications it held that:

"Few problems in the law have given greater variety of application and conflict in results than the cases arising in the borderland between what is clearly an employer-employee relationship and what is clearly one of independent, entrepreneurial dealing.”

Nor have things gotten any easier. If anything, the issue has become more complicated with modern technology. High speed reliable internet has resulted in a major increase in the number of people working from home. Moreover, employers continue to push the envelope, exploring every avenue that will allow them to classify people that do work for them as independent contractors instead of employees. Indeed, it has been argued that if some industries, such as ride sharing (think Uber and Lyft), package delivery services, and software developers to name a few, were forced to classify their workers as employees, they would collapse. 

Regardless of whether or not this is true, no one can argue that more and more companies are coming up with business models that rely on workers being independent contractors rather than employees.

So the challenge becomes to come up with rules and criteria that will allow us to make the distinction in specific cases.

Some are easy.

The worker that goes to work every day, clocks in, or goes to his office/cubicle, has a supervisor, works according to a schedule, and does the work assigned by his employer, is an employee. No gray areas here. Nothing confusing.

Now consider the flip side. You hire someone to come and paint your house. He quotes you a price. You agree to pay a deposit with the balance due on completion. He gives you a date by which the job will be completed. While the project is underway there are days where he works all day. There are days when he works a few hours a day. He provides his own supplies and equipment. This man is clearly an independent contractor. Again, no gray areas. Nothing confusing.

But in between those two easy examples, there is a tremendously huge gray area.

 Since the Supreme Court decision in Hearst, there have been a lot of federal and state decisions in which the court has attempted to set forth an objective test to distinguish between employees and independent contractors. It’s not easy and there have been a lot of conflicting decisions.

The most recent significant decision has come from California. The case of Dynamex Operations West, Inc. v. Superior Court may be pivotal. Not only does the court set forth objective criteria to determine whether or not an worker is an employee or an independent contractor, it sharply restricts the circumstances under independent contractor status will be found.

This case involved a lawsuit by drivers engaged by Dynamex Corporation as delivery drivers. Dynamex classified the workers as independent contractors, so they had no guarantee of receiving minimum wage, did not receive overtime compensation, workers’ compensation coverage or unemployment coverage. The workers sued, saying that regardless of what Dynamex chose to call them, they were in fact employees, entitled to all the benefits and protections that other employees received.

The court held in favor of the workers and fashioned the A-B-C test, described as follows:

1. Part A: Is the worker free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact?

2. Part B: Does the worker perform work that is outside the usual course of the hiring entity's business?

3. Part C: Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity?

These are tough tests for a person or entity engaging workers to fulfill. They are even more difficult because the court also held that the burden of proof is on the employer to establish ALL of these three tests. Failure to establish even one of the three will result in the worker being classified as an employee.

While it is true that the decision in this case applies only to California, a review of the history of prior California decisions in this area, and how they came to be adopted by other states and even federal courts, suggests that this is the direction that will be followed in the future.

This decision will likely affect many of the industries that make use of “independent contractors” such as ride sharing services, delivery services and so forth.

What does this all mean to you? Well given that many employers attempt to avoid their legitimate obligations by designating workers as independent contracts as opposed to employees, it is not unreasonable to expect that at some point you may find yourself in this position. Wanting to work for some person or entity, but being told that you will not be an employee, but instead an independent contract, and will be asked to sign documents to that effect.

Despite the hype that may accompany such a request, it is almost never to your advantage to be classified as an independent contractor. You will not have any of the benefits or protections provided under state and federal law to employees. You will be responsible for paying taxes that have not been withheld. You will have to pay all of the self-employment tax where as an employee you would pay only half. If you are hurt on the job, there is no workers compensation coverage for you. When you are terminated there are no unemployment benefits.

So what is your remedy?  

You can, and should bring a claim for all the benefits that you should have received as an employee. Back pay if you did not receive minimum wage or overtime. If you get hurt, for all the benefits you would have received under workers’ compensation. Payment of any self-employment taxes you night have had to pay. In short, everything.

And don’t worry about whatever you may have been required to sign saying that you are an independent contractor. Almost all states and certainly the federal government ignore those “agreements” and look to the actual relationship of the parties.

The pay-off can be substantial. Many states have punitive provisions (up to three times actual amount) for unpaid wages. If there have been any tax consequences for failure of the “employer” to withhold, you can recover those. If you were injured on the job, you can recover all medical bills and lost wages because the employer should have been providing workers’ compensation coverage. Likewise if the “Employer” is subject to health insurance coverage for its employees but provided you none because you were an independent contract. 

The list goes on and on, but you have to be aggressive and pursue your rights.

Remember, as with all of these issues, if you think you have a claim or a grievance, Be Your Own Lawyer will always review it for you at no cost.