Employee Classification: Exploring the Complexity of Making a Legally Correct and Defensible Determination
Determining if someone is an employee or an independent contractor (IC), under common law is one of the most complex and underestimated areas of law in the United States.
There are several reasons for this.
Different jurisdictions view the same facts with different purposes, or for different applications, which can result in different conclusions.
Most state workman’s compensation agencies, such as California’s Department of Industrial Relations (DIR), have a much lower threshold to calling an individual an employee than either California’s Employment Development Department (EDD) or the IRS. So the same worker could be an IC for the IRS or EDD and an employee for DIR. That is because the DIR has a philosophy, and case law in the courts, that if someone is injured while working they should be entitled to medical care at the employer’s expense, so the threshold is lower to make someone an employee.
On the other hand, California’s EDD has a slightly higher threshold because it also collects payroll taxes and the courts have been more reluctant in calling every worker brought before them an employee. However, since the EDD also pays unemployment insurance benefits to workers the threshold is still lower than the IRS who only collects taxes. The courts have traditionally held a higher standard for the IRS before forcing a worker into the employee classification because the IRS is only enforcing tax laws, not social programs like workman’s compensation or unemployment benefits.
Business, and even some attorneys, underestimate the level of detail that can be involved in determining if someone is an employee or IC.
Therefore they are not prepared for the misclassification challenge and can easily make mistakes.
Most people know that in general, the tools, equipment supplies and work space are normal items and expenses an independent contractor (or business) pays for as a normal cost of doing business. Employees expect to receive this support as part of the employment relationship.
So if you have a delivery truck driver with his own truck (equipment) that would be a factor that supported an IC. But how did he get the truck? Did you lease or sell it to him? Who arranged for the financing? Are the payments deducted from the money you pay him for delivering? Do you pay for his gas? Who provides the insurance for the truck? Who pays to maintain the truck? Is he required to have it painted a particular color or with your company design and logo? If so, who pays for that? Can he use the truck to deliver for your competitors? Can he use it over the weekend to help his cousin move? If he terminates, is he required to give/sell the truck back? Can he sell it to someone else without your permission? Suddenly just this single factor, equipment, isn’t so simple. The IRS has 20 such factors and each has a like number of sub factors to consider. Most laypersons aren’t even aware of this level of complexity until it is too late.
In the real world there are individuals who have different capacities for attention to detail.
The rules are generally the same, but often there are different levels of attention to detail by auditors and investigators. Like many other issues judged by humans, show the exact same facts to two different people and you are likely to get two different interpretations. Employee versus IC common law determinations are no different. As such one auditor will make a “quick and dirty” determination, while an auditor from a different agency may dig deeper and uncover more aspects of the same working relationship and come to a different conclusion. From a layperson’s point of view this appears to be the fault of the application of law, when it is actually the fault of the auditor who did a “quick and dirty” job.
There is an employee-independent contractor axiom: Employee and independent contractor are, almost without exception, always mutually exclusive events.
If you have an employee he/she can not also be your IC. If he was once your employee you can not simply reclassify him to an IC, doing the same job, under the same working relationship. If you do you will have a misclassified worker.
A final word: There is a primary rule of common law.
Here it is: No single factor alone will decide the status of a working relationship.
Common law consists of a list of factors that describe the working relationship (such as the IRS’ 20 factors). All of the factors must be considered and weighted to make an accurate decision. A common mistake made by laypersons is to latch onto one or two factors that are favorable to their point of view and ignore the others. This approach will almost always cause you to make the wrong determination. Also, different factors are weighted differently for different professions. It takes a true expert to make the correct decision.