Shakespeare asked, “What’s in a name?” You may answer “independent contractor,” but someone else would say, “employee.” Does it matter? You better believe it. There are numerous laws that may very well cause employers to pay a lot more than they bargained for when hiring people and treating them as independent contractors. A recent court decision revisits the factors used in determining whether an individual is an independent contractor rather than employee.
In Beaumont-Jacques v. Farmers Group, Inc., the plaintiff was appointed as a District Manager for Farmers Insurance. At time of hire, she entered into a District Manager Appointment Agreement which stated that the parties were not creating an employer-employee relationship, and that the time, place and manner of the plaintiff’s work was solely within her discretion. The Agreement allowed Farmers to establish “goals and objectives” with respect to sales of its products and required plaintiff to conform to Farmers’ “regulations, operating principles and standards” and to engage in “normal good business practice.”
Plaintiff’s duties included recruiting insurance agents exclusively to sell Farmers insurance; train and motivate the agents to market Farmers insurance; and represent Farmers in sales of insurance products made by agents she recruited. Plaintiff was prohibited from representing or marketing insurance for any other insurance company.
After she was terminated plaintiff brought suit against Farmers for breach of contract, breach of the implied covenant of good faith, and sex discrimination under the Fair Employment and Housing Act (FEHA). All of plaintiff’s causes of action were predicated upon the proposition that she was in an employer-employee relationship and was not an independent contractor. On motion for summary judgment, the trial court dismissed all of the plaintiff’s claims, finding that she was not an employee of Farmers, but in fact, an independent contractor. Plaintiff then appealed.
In upholding the trial court’s decision, the Court of Appeal, citing the California Supreme Court decision in McDonald v. Shell Oil, held that the pivotal inquiry is whether the principal has the right to control the manner and means of accomplishing the result desired. To that end, the principal may still retain a broad general power of supervision and control as to the results of the work in order to insure satisfactory performance, including the right to inspect, make suggestions or recommendations as to details of the work, and to prescribe alterations or deviations in the work without changing the relationship from that of independent contractor to employee. The key is the right to control, rather than the amount of control which is exercised.
The court found that the plaintiff exercised meaningful discretion in recruiting, training and motivating agents. She determined her own day-to-day hours, including vacations. She hired and supervised her own staff while remitting payroll taxes for them as employees. She paid for her costs such as marketing, office lease, telephone service and office supplies and deducted those costs as a business expense in her personal tax returns in which she identified herself as self-employed.
Although Farmers required plaintiff to submit annual business plans and attend district meetings, and had the sole and final authority to hire and dismiss any agent in plaintiff’s district, this did not mean Farmers controlled to any meaningful degree the means by which plaintiff performed and accomplished her duties as a District Manager.
This decision is helpful to employers subjected to scrutiny by administrative agencies over the status of their independent contractors. Some administrative agencies may be too quick to find that a true contractor is really an “employee.” The inquiry is based on a totality of factors and not just the contract itself. These factors include, but are not limited to:
- Who supplies the tools and instrumentalities for the work?
- Is the individual engaged in an occupation commonly performed by a specialist?
- Is the individual engaged in a stand-alone occupation or business?
- Does the job require a high degree of skill?
- Is the individual retained for a finite project or duration?
- Is the method of payment more typical of an employer-employee relationship?
- Is the work performed part of the employer’s regular business?
- What do the parties think their relationship is?
Employers must continually take stock of workers deemed to be “independent contractors.” This is because if, in fact they are common law employees, serious consequences can flow under several laws. The following are just a few of the laws that can get an employer and a “contractor” in hot water if the worker turns out to be a common law employee.
- The Public Employees’ Retirement Law (PERL). The PERL uses the common law definition of employee used in Beaumont–Jacques in defining those who are to be included in CalPERS membership. See our article here.
- The Patient Protection and Affordable Care Act (ACA). ACA uses the same common law definition of employee used by the IRS in determining when employers must provide affordable health coverage to its employees.
- Ethics laws for governmental employees (e.g. Government Code section 1090 and the Political Reform Act (PRA).) Only government employees, but not true independent contractors, are required to follow these laws. See our earlier article here.
- Workers’ Compensation Law. Knowing who is an employee and who is really an independent contractor affects the employer’s degree of liability for injuries. See our articles here and here.
- Anti-Discrimination and Harassment laws under Title VII, FEHA and the Americans with Disabilities Act (ADA). Some of these laws protect only employees and some also protect independent contractors. See our previous articles here and here
- Internal Revenue Code provisions on payroll withholdings for Social Security, unemployment insurance, and Medicare. See our earlier article on this here.
- Civil Rights. The status of a worker as an employee can affect the standard under which civil rights violations are tested, as well as employer defenses. See an example here.
- Labor relations acts. Employees, but not independent contractors, have collective bargaining right under the Meyers-Milias-Brown Act (MMBA), the Educational Employment Relations Act (EERA), and Trial Court Interpreter Employment Relations Act, among others. See a related article here.
Taking the time now to review the true status of your “independent contractors” will save you the greater time and expense later if it turns out your contractor is really an “employee.”