A new law for 2012, SB 459, adds Labor Code § 226.8. It adds enforcement penalties for misclassification of workers as independent contractors.
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Worker Deemed Independent Contractor,
Labor Code Claims Denied
By Christopher W. Olmsted
Proper classification of a worker as an independent contractor involves careful consideration of a variety of factors. Often the distinction between employee and independent contractor is not black and white. The potential liability of an erroneous decision can be significant, particularly given recent amendments to California law dramatically increasing penalties. Nevertheless, employers often make the correct decision, as illustrated in the recent California appellate court case titled Arnold v. Mutual of Omaha Insurance Company.
An Insurance Broker Sues
Kimbly Arnold worked as an independent contractor insurance broker for Mutual of Omaha Insurance Company from November 2006 to March 2008, at which time she quit. Afterwards, she filed a class action lawsuit alleging that she had been improperly classified as an independent contractor. She alleged, she was actually an employee. As an employee, she alleged, was entitled to reimbursement for business expenses as well a certain wages.
The insurance company defended on the ground that Ms. Arnold was properly classified as an independent contractor, and therefore was not entitled to the Labor Code remedies provided to employees.
Independent Contractor Factors
In California, the principal test for independent contractor status is found in a 1989 California Supreme Court case titled S.G. Borello & Sons, Inv. v. Department of Industrial Relations. In that case, the court listed standard factors relevant to independent contractor status. The principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired. There are a number of secondary factors. They include:
(a) Whether the principal has the right to discharge at will, without cause;
(b) Whether the one performing services is engaged in a distinct occupation or business;
(c) 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;
(d) The skill required in the particular occupation;
(e) Whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;
(f) The length of time for which the services are to be performed; the method of payment, whether by the time or by the job;
(g) Whether or not the work is a part of the regular business of the principal; and,
(h) Whether or not the parties believe they are creating the relationship of employer-employee.
These are the accepted common law criteria in California. Note that depending on the applicable state law or agency regulation, these criteria may vary slightly.
Insurance Broker Was Independent
The court reviewed the Borello factors and determined that Arnold was indeed an independent criteria.
No supervision. The agent used her own judgment in determining whom she would solicit, the time place and manner of solicitation, and the amount of time she spent soliciting this particular insurance company’s products. Mutual managers made themselves available to assist agents, as distinguished from supervising them. Mutual did not evaluate her performance and did not monitor her work.
No mandatory training. Training was generally not mandatory and was offered chiefly for the guidance of “new” agents. Training was required only with respect to compliance with state law directives.
Workers paid expenses. Conference rooms, if available, were provided as a courtesy to agents seeking to set up a meeting and have no other space in the office. Mutual policy did not otherwise reimburse agents for regular business expenses, such as entertaining a client. The agents paid a fee for the use of office workspace and telephone service.
No salary guarantee. While Mutual paid its agents in two-week periods, payments were comprised of commissions and bonuses established by policy, and there was no guaranteed compensation. Arnold was paid based on her results and not the amount of time she spent working on Mutual’s behalf.
At Will. Either party could terminate the contract with or without cause through written notice to the other. This factor did not support independent status.
Licensed as Independent/Non-exclusive. Arnold was engaged in a distinct occupation requiring a license from the Department of Insurance. She was licensed as an independent agent or broker, authorized to offer products to prospective clients from different companies. When she first contracted with Mutual, in November 2006, she was under appointment with another insurance company to offer its products, and while under that appointment had acted on behalf of a third insurance company. At both of these insurance companies she performed as an independent contractor, receiving commissions and 1099 tax forms for that income.
Written Contract. Arnold signed a written contract which gave her the freedom to control her work. It defined the relationship as independent.
The court found that although not all of the factors favored the employer, the weight of the evidence was sufficient to establish independent status.
Recent Amendments Significantly Increase Penalties
A new law for 2012, SB 459, adds Labor Code § 226.8. It adds enforcement penalties for misclassification of workers as independent contractors.
The new law imposes a civil penalty for the “willful misclassification” of a worker. The penalty amount ranges from $5,000 to $15,000 per misclassified worker. An additional lump sum of $10,000 to $25,000 may be imposed where the employer has engaged in a “pattern or practice” of willful misclassification.
“Willful misclassification” means “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.”
Additionally the hiring company may also be liable for charging fees or expenses to the improperly classified independent contractor. Liability may be imposed for “charging a fee, or making any deductions from compensation, for any purpose, including for goods, materials, space rental, services, government licenses, repairs, equipment maintenance, or fines arising from the individual’s employment” where it would have been improper to charge any employee for such items.
Given the significant increase in liability for misclassification, employers should take extra care to ensure that they have properly evaluated the criteria.
Practical Tips:
Contracts Alone Aren’t Sufficient. Although the existence of a contract helps support independent status, if the other factors are not satisfied the contract will do no good.
Must you control? There is a trade off. If the company needs to exercise control over the manner and means of performing the work, then consider hiring such workers as employees. But remember, even where the employer exercises little or no control, a court may deem the worker to be an employee where the position is low skill or where the worker performs an essential service of the company.
Complimentary Chart Available Barker Olmsted & Barnier APLC offers a complimentary chart summarizing the independent contractor factors. Request your copy by emailing Chris Olmsted at cwo@barkerolmsted.com
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