It’s critical for business owners to know whether their personnel are employees or contractors. The importance of distinguishing between employees and contractors (or consultants) in your business cannot be overemphasized.

Who Regulates Employees and Independent Contractors in California?

Two State of California agencies that are involved in the determination of employees vs. contractors are the Employment Development Department (EDD) and the Division of Labor Standards Enforcement (DLSE). Other agencies, such as the Franchise Tax Board (FTB), Division of Workers’ Compensation (DWC), and the Contractors State Licensing Board (CSLB) also have regulations regarding employment and engagement of independent contractors. Other states have similar agencies. If you misclassify your employees as contractors, you may be liable for payroll taxes, minimum wage or overtime, compliance with other wage and hour requirements (like meal and rest breaks), workers compensation insurance and more. As we mentioned in our previous article, Top 5 Tips for Using Independent Contractor Agreements, this is serious stuff that could lead to massive penalties against employers.

Test for Employee vs. Independent Contractor

There are many factors that are considered by courts and state agencies to determine whether an individual is an employee or independent contractor. Perhaps the most important of these factors is the level of control that the employer has over the worker and the manner and means by which the work is performed. The following are additional factors that may be considered, though none are determinative on their own:

1. Whether the individual performing the services is engaged in a business that is separate and distinct from that of the hiring party.
2. Whether or not the work being performed is actually part of the hiring party’s regular business.
3. Whether the hiring party supplies the tools, equipment, instruments, devices, and the place for the person doing the work.
4. The investment that the worker has made in the equipment, technology, or materials that are required for him/her to complete the work.
5. Whether the services performed by the worker require a special skill.
6. How that occupation is normally treated in that locale. If the occupation is normally done by someone who is supervised, versus independently, then it is more likely that the worker is an employee.
7. The worker’s opportunity for profit or loss based on his managerial skill.
8. The length of time for which the services are performed. Courts have consistently held that independent contractors are not meant to be engaged for long periods of time. It’s not uncommon for principals to limit the engagement of independent contractors for periods of less than a year.
9. The degree of permanence of the working relationship.
10. The methods of payment, whether by time or on a project basis.
11. Whether or not the parties believe they are creating an employer-employee relationship or on of an independent contractor relationship.
12. Whether the hiring party and the worker have signed an independent agreement or an at-will or other type of employment agreement. It helps to have an independent contractor agreement in place if that is the intention, though it is not, on it’s own, enough to prove whether a worker is actually an independent contractor.
13. Whether the worker is issued a 1099 form for independent contractors, rather than a W-2 form for employees.

If you’re not clear on whether your personnel are actually employees or independent contractors, make sure you consult with an experienced business or employment lawyer for guidance.  You may also want to start by reading about Hiring Employees vs. Consultants.

Using an independent contractor agreement can significantly help to clear up any confusion between parties around roles, responsibilities, and legal obligations.

Startup founders should carefully weigh the benefits and disadvantages of engaging Consultants vs. Employees in their companies and always enter into detailed contracts with all personal prior to the commencement of any work.

Startup Documents offers a fairly comprehensive Independent Contractor Agreement template generator. Remember to always consult with a lawyer if you have any questions!