Many small businesses rely on independent contractors to provide various services that are needed to exist in this increasingly complex business environment. Perhaps the most conspicuous independent contractors are professionals, such as doctors, attorneys, and accountants. However, the use of independent contractors is not confined to these visible professions. In fact, you can find the use of independent contractors sprinkled throughout the trades and general workforce.

For small businesses, the use of independent contractors as a part of their business model offers many advantages. The business does not have to withhold income taxes or deduct the usual suspects such as FICA, SDI, unemployment insurance, etc. Nor does the business have to contribute its matching share to those social programs. There are other advantages. Independent contractors are not subject to the state’s labor laws, including Department of Fair Employment and Housing (“DFEH”) complaints, state wage and hour statutes, Federal Fair Labor Standards Act (“FLSA”) provisions, worker’s compensation insurance, as well as a host of other laws and regulations aimed at protecting employees. The very term “independent contractor” denotes an independent service provider contracted with, but not employed by, a business or person. Or does it?

California is the archetypal “nanny” state and is very concerned about the welfare of all of its “children,” especially those employed by the “evil” businesses whose sole purpose is to lie, cheat, and steal. It’s no wonder that California’s maze of statutes, codes, regulations, and rulings help make it the 49th worst place to do business in the country. Oh well, at least the weather is great.

But, I digress. Given the state’s paternalistic attitude, it is not surprising that much labor litigation has revolved around the issue whether a service provider is a true “independent contractor” or a de facto employee. For the business, a finding of the latter can be a financial disaster of titanic proportions, including fines and penalties that can reach upwards of $25,000.00 per day, as well as the spectre of class action litigation. Such misclassification of service providers should be avoided at all costs. Any reward of avoiding some taxes or benefits is simply not worth the risk. Just ask Fed Ex, SuperShuttle, and Uber, just to name a few.

How can you tell who is truly “independent” and who is not? Over the years the legislature and courts have developed a “laundry list” of non-exclusive traits that distinguish an independent contractor from an employee. Notice I said non-exclusive, since neither politicians nor judges like to be pinned down if it can be avoided. You also have to understand that there is a presumption of employment embodied in the Labor Code. This means, if someone is working for you, they are an employee unless you can prove otherwise.

In no particular order the following points should provide some guidance as to “independent” status:

• Does the independent contractor maintain his/her own office or does your business provide the work space?
• Does the independent contractor have other clients besides your business?
• Is the independent contractor a corporation, LLC, or some other legally recognized entity, or is he/she just an individual providing a service?
• Does the independent contractor have a business license and carries business and worker’s compensation insurance?
• Does the independent contractor set his/her own hours and may decline jobs or assignments he/she does not wish to pursue?
• Is the independent contractor required by your business to wear a certain uniform or use the organization’s equipment such as specially marked trucks? Listening Fed Ex?
• Does the independent contractor have employees to conduct its business?
• Does the independent contractor provide your business with a periodic itemized statement or invoice detailing the services provided?
• Are your relations with the independent contractor contractual and not terminable at will by you?
• Is the independent contractor performing work not in the ordinary course of your business?
• Does the independent contractor have a license issued pursuant to the Business and Professions Code?
• Is the independent contractor performing work that requires a particular skill or knowledge?
• Is the independent contractor responsible to you for the result of his/her work rather than control by you of the means by which the result is accomplished? This is the famous “control of work” test embodied in the Labor Code.

For you, the small business person, what seems to be “win-win” can be a real “loser.” Some would-be employees will suggest they be treated as independent contractors—also known as “1099 service providers”—in order to avoid withholding taxes and their contribution to the state’s other mandated employment programs. Simply put, it’s a matter of more money in his/her pocket every pay period. It seems like this arrangement would be a “win” for both of you since less taxes are better than more and whose to know?

Of course, all good things come to an end. Typically, this occurs when you want to terminate the arrangement or when the “1099 service provider” is injured on the job. All of a sudden he/she claims worker’s compensation benefits or files for unemployment or disability. Wonder of wonders, now they want to be classified as employees for, what else, the benefits. This is when EDD begins its investigation of your business practices and you are on the hook for all sums that you should have paid, plus interest and penalties. Good luck with that.

The bottom line is, be very careful about utilizing “independent” contractors unless they are truly “independent.” Keep accurate records of each transaction and document their independent contractor status. Remember, as with employees, those who would be “1099 services providers” are not your friends.

Copyright 2015