Much of wage and hour class action litigation has concerned claims alleging that a group of employees is misclassified as exempt employees resulting in the employees not being paid overtime or subject to State meal and rest break requirements. Most of this litigation concerned claims involving the Executive and Administrative exemptions. Today, however, we see an increasing amount of litigation involving claims that workers have been misclassified as independent contractors when, in fact, they are employees. The rise in such claims is not surprising given the poor economic conditions over the past few years. Employers are under constant pressure to minimize labor costs. By treating a group of workers as independent contractors, companies save hundreds of thousands or, perhaps, millions of dollars because they no longer reimburse workers for out of pocket expenses necessary to perform the work and don’t pay overtime. Additionally, by treating these workers as independent contractors, corporations save by not having to pay ever-increasing costs of employee benefits, including health insurance and retirement benefits. But, the company sometime gets the independent contractor classification wrong.
When assessing whether workers are properly classified as independent contractors one must examine the applicable state of federal law. Most state law, including California, follows traditional agency law that focuses on the principal’s right to control the manner and means of accomplishing the workers desired result. Under this test, “if the employer has the authority to exercise complete control, whether or not that right is exercised with respect to all details an employer-employee relationship exists.” Empire Star Mines Co. v Cal. Emp. Com. 28 Cal. 2d 33, 43 (1946). Although the right to control remains a significant factor, a mulit-factor analysis is also utilized with the following issues considered: whether the person performing the services is engaged in an occupation or business distinct from the principal; whether or not the work is a part of the regular business of the principal; whether the principal or the worker supplies the instrumentalities and tools of work; the workers investment in the equipment or materials required by his task; the skill required of the particular occupation and whether it is usually done without supervision; the workers opportunity for profit or loss depending on his managerial skill; the duration of work and degree of permanence; the method of payment whether by time or on the job; and whether the parties believe they are creating an employee-employer relationship. S.G. Borrello & Sons, Inc. v Dept of Industrial Relations, 48 Cal. 3d 341 (1989). Virtually all contracts will designate the worker as an independent contractor and contain boilerplate language purporting to give the worker the right to control their work. However, the title of independent contractor does not govern but rather the true nature of the relationship controls.
Claims brought under the Fair Labor Standards Act (FLSA) apply a slightly different test. The definition of employee under the FLSA is particularly broad. See Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 326 (1992) (noting that the FLSA “stretches the meaning of ‘employee’ to cover some parties who might not qualify as such under a strict application of traditional agency law principles”).To determine if a worker qualifies as an employee, the focus is on whether, as a matter of economic reality, the worker is economically dependent upon the alleged employer or is instead in business for himself. Herman v. Express Sixty-Minutes Delivery Serv., Inc., 161 F.3d 299, 303 (5th Cir. 1998). To aid in this inquiry, five non-exhaustive factors are considered: (1) the degree of control exercised by the alleged employer; (2) the extent of the relative investments of the worker and the alleged employer; (3) the degree to which the worker’s opportunity for profit or loss is determined by the alleged employer; (4) the skill and initiative required in performing the job; and (5) the permanency of the relationship. Id. No single factor is determinative. Brock v. Mr. W Fireworks, Inc., 814 F.2d 1042, 1043–44 (5th Cir. 1987). Rather, each factor is a tool used to gauge the economic dependence of the alleged employee, and each must be applied with this ultimate concept in mind. Id.
Therefore, it is critical for workers in an independent contractor arrangement to be alert that they may be employees under the law and entitled to protections afforded under the labor laws and to the same benefits that a principal affords its employees. Workers should not be fooled by boilerplate language in their contract but rather keep in mind the ways the principal has the right to control their work.
