In December 2008, newspaper carrier Maria Ayala sued Antelope Valley Newspapers on behalf of herself and a putative class of other newspaper carriers. The crux of her allegations in the complaint is that Antelope Valley classified its carriers as independent contractors when, as a matter of law, they are actually employees. Why does this classification matter? Well, according to the complaint, because the carriers were incorrectly classified, they had not been paid overtime, had unlawful wage deductions taken, were not provided breaks, and were not reimbursed for their business expenses incurred on behalf of the company, among other violations. In other words, a very costly mistake.
Many employers unwittingly make the same mistake. Hiding behind a deftly crafted “Independent Contractor Agreement” and some 1099s, employers often convince themselves that they are insulated from the responsibility and potential liability of incorrectly classifying their worker. They believe they have control over their work relationships and over their legal liability. On this false sense of security, however, the California Supreme Court has shed some clarity and light in the recent case of Ayala v. Antelope Valley Newspapers, Inc.
Unless your business is delivering newspapers, the results of the Ayala case are not important. What is important, however, is the analysis that the Court applied. In deciding whether the Ayala class plaintiffs were employees or independent contractors, the Supreme Court applied the “common law” test, although there are other tests for employment that could be applied in some situations.1
Under the common law, the primary test of an employment relationship is whether the person or entity to whom service is rendered has the right to control the manner and means of accomplishing the result desired. To be clear, what matters here is not how much control a hirer exercises, but how much control the hirer retains the right to exercise. In other words, the fact that a certain amount of freedom of action is inherent in the nature of the work does not change the character of the employment where the employer has general supervision and control over it.
“Perhaps the strongest evidence of the right to control,” said the Supreme Court, “is whether the hirer can discharge the worker without cause, because the power of the principal to terminate the services of the agent gives him the means of controlling the agent‘s activities.” Similarly, the worker‘s corresponding right to leave also matters because an employee may quit, but an independent contractor is legally obligated to complete the work in the contract.
In most circumstances, the analysis can be conducted simply by applying the primary test of control. It is a simple test and often all that is necessary to determine employment status. However, although not strictly part of the common law test for employee status, the Supreme Court recognized a host of secondary criteria that may also be evidence of an employment relationship when the primary test is not in itself determinative. These secondary criteria include:
whether the one performing services is engaged in a distinct occupation or business;
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 skill required in the particular occupation;
whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;
the length of time for which the services are to be performed;
the method of payment, whether by the time or by the job;
whether or not the work is a part of the regular business of the principal; and
whether or not the parties believe they are creating the relationship of employer-employee.
Having control is powerful, but it comes with responsibility. Perhaps it is time to audit and correct your worker classifications. Or, perhaps it is time to let go of all the control.
1 For example, according to the California Wage Orders, an employer is any person (e.g., association, organization, partnership, business trust, limited liability company, or corporation) who directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of any person.
For purposes of the EDD, a statutory employee is defined as an employee under a specific statute, such as when an author or artist is commissioned for a specifically ordered work and the written agreement between the parties states that the work is a “work made for hire” and the party ordering the work obtains all rights in the copyright of the work. See http://www.edd.ca.gov/pdf_pub_ctr/de231se.pdf for additional information.
For purposes of establishing the need for Worker’s Compensation coverage, an employee is “any person who renders service for a specified recompense for a specified result, under the control of his principal as to the result of his work only and not as to the means by which such result is accomplished.”
For purposes of taxes and social security, the IRS reviews behavioral, financial and contractual criteria using a 20 factor test to determine whether a worker isan employee or independent contractor. See http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee for additional information.