Companies use independent contractors, instead of employees, to perform certain functions for many different reasons. Often, companies find it easier in the short term to retain an “independent contractor” rather than to hire a new employee. Sometimes, managers use independent contractors to get around head count restrictions. However, there are potential risks associated with classifying anyone performing work or providing services for a company as an independent contractor. Two recent California Court of Appeal decisions found in favor of independent contractor status in the face of a challenge to that status; however, both decisions highlight the difficulty in defending independent contractor status against a later challenge.
In both Happy Nails & Spa of Fashion Valley v. Julie Su and Beaumont-Jacques v. Farmers Group Inc., the respective California courts concluded that workers at issue met the test for independent contractor status using an almost identical analysis. In Happy Nails & Spa of Fashion Valley, the Employment Development Department assessed the company for unpaid unemployment insurance contributions contending the cosmetologists were actually employees for whom the spa should have been making contributions. An administrative law judge conducted an extensive evidentiary hearing and concluded the cosmetologists were in fact independent contractors. The administrative law judge and the later reviewing court both focused on the fact that the Spa exercised no control over the cosmetologist who used their own skills and judgment for providing services and who provided, at their own expense, many of the materials and all of the equipment they used.
Similarly, the Farmer Group, Inc. decision focused on whether the company had the right to “control the manner and means” by which the independent contractor “district manager” performed services. The court found it persuasive that the district manager at issue had control of her schedule; independently hired, supervised and pay-rolled her own staff; paid for costs such as marketing, office lease, telephone services and office supplies, and deducted those costs on her personal tax returns, identifying herself as self-employed on those returns. All of these facts suggested to the court that the company had limited, if any, control over how she provided services.
While both of these decisions came out in favor of independent contractor status, both provide examples of how such status is open to challenge. In the Happy Nails & Spa of Fashion Valley case, the EDD inserted itself by assessing the company for unpaid unemployment insurance contributions. In the Farmers Group, Inc. case, the independent contractor district manager challenged the independent contractor status after having collected all the benefits of the agreement contending it was a scheme to avoid taxes and the Labor Code. Fortunately for the companies involved, in both these instances they were able to marshal evidence to establish the fact that the independent contractor at issue had control over the “manner and means of providing the desired result.” However, there are many instances in which the issue of “control” is much less clear.
If you currently use or are contemplating using independent contractors, examine how much control, either in the independent contractor agreement, or in practice, the company maintains over how the “independent contractor” performs services. If independent contractor status is challenged, the company will need to convincingly prove that it did not maintain control, or had only very limited control, over the manner and means by which the independent contractor performed services.