THE IMPORTANCE OF WORKER CLASSIFICATION: EMPLOYEES VS. INDEPENDENT CONTRACTORS
Many companies know that it is important to accurately classify their workers. Whether someone is an employee or independent contractor can have significant impacts on a company and how it does business. Classifying workers as employees requires that the employer abides by local, state, and federal laws regarding minimum wage, meal periods, rest breaks, worker’s compensation, and tax withholdings (among other requirements). The classification determination is not always an easy one to make, and incorrectly classifying a worker can have substantial consequences to both the company and the worker.
As a little background, there is a multiple factor test that determines the classification of workers as either employees or independent contractors. The test comes from the California Supreme Court case, S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989). Arguably, the most significant factor to be considered is whether (and to what extent) the hiring company has control over the work being done and the manner and/or means in which it is performed by the worker. Other factors that are considered per the California Department of Industrial Relations include:
- Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
- Whether or not the work is part of the regular business of the principal or alleged employer;
- Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
- The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment helpers;
- Whether the service rendered requires a special skill;
- The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
- The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
- The length of time for which the services are to be performed;
- The degree of performance of the working relationship;
- The method of payment, whether by time or by the job; and
- Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.
It is important to remember that not one factor outlined above is controlling in the classification of workers, and courts will use a case-by-case analysis in making the determination.
Recently, the popular online food delivery service GrubHub, Inc. was taken to court to determine if its workers were being classified incorrectly as independent contractors. In this case, the U.S. District Court for the Northern District of California ruled for GrubHub and used the Borello multi-factor test in determining whether the workers were employees or independent contractors.
As Daniel Pasternak points out in his article for Lexology®, the Borello test, “focuses on ‘whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.’” In the GrubHub case, the court determined that the workers are independent contractors because they are able to control when, how, and by what means they work. GrubHub delivery workers are allowed to choose their own particular mode of transportation, decide when they work, and decide where they work. As noted above, transferring this amount of control related to performing and completing the job task from the employer to the worker is a strong indication of an independent contractor classification.
The importance of proper worker classification cannot be overstated. Improper classification can open companies up to liability for unemployment insurance, workers’ compensation, and disability insurance – possibly hemorrhaging a company’s bottom line.
In the end, the courts will look to each case individually and apply a combination of factors. Often, the most important factor will be the amount of control that a company exerts over the tasks and the means of completing those tasks.
When it comes to employee classification, it is vital to be proactive rather than reactive. If you’re unsure as to what classification you should be making with regard to your workers, contact us. Our knowledgeable and friendly attorneys can assist you and your company with questions surrounding worker classification and any other employment-related issues you may have.
By: Preston L. Ryan, Esq.