Employee vs. IC Legal Guide

The hot topic in the employment world is figuring out if you have independent contractors or employees. Employers often categorize employees are independent contractors in order to avoid having to pay payroll taxes and obtaining necessary benefits, such as workers compensation insurance, and now, health insurance. However, miscategorizing employees as independent contractors can be a very dangerous move.

Not only can the employee improperly classified as an independent contractor sue the employer or file a claim with the Labor Commissioner for unpaid minimum wages or overtime pay based on the work performed for the employer (and get waiting time and other penalties too), but the IRS is really cracking down on enforcing improper categorizations against employers, entitling them to sometimes years of back payroll taxes and penalties.

There are a series of factors that a court or the IRS evaluates in determining if a person is an employee or independent contractor. The most important factor is who has the right to control the work.

In a recent case decided by the 9th Circuit Court of Appeals (a federal court that makes decisions for several states, including California), the court found that delivery drivers, who provided home delivery services (usually furniture) were improperly classified as independent contractors. In making the decision, the court relied heavily on the employer's control of the drivers, including calling them each day and providing them with route manifests that dictated what needed to be delivered that day. The employer also controlled and provided the equipment the drivers used, required them to wear company uniforms and closely monitored their activities. Thus, the court decided that under California law, the drivers were employees and not independent contractors. [Ruiz v. Affinity Logistic Corp (9th Cir.) 12-56589.]

It is vital that every employer properly evaluate whether its independent contractors are employees, before the employer is in the middle of a lawsuit or IRS investigation.