Do You Really Have an Idependent Contractors Agreement ?

Employers and entrepreneurs often employ individuals as independent contractors in an effort to avoid having to pay for workers' compensation insurance, taxes, benefits and to avoid wage and hour laws. Sometimes they take steps to insure they are in fact contractors, but more often than not they do not.

Whether there is an employer employee relationship depends on many different factors. There is no one single factor and the risk of liability is not completely eliminated, even when there is a written agreement.

The courts look to many different factors to determine if there is an employment relationship or independent contractor status. Strong evidence in support of an employment relationship is the right to discharge at will, without cause. Additional factors that are taken into consideration are as follows:

(a) whether the one performing services is engaged in a distinct occupation or business;

(b) 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;

(c) the skill required in the particular occupation;

(d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;

(e) the length of time for which the services are to be performed;

(f) 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.

This is are just factors that would weigh in favor of one side or the other and not determinitive of the outcome. In addition to these factors the the court or appeal and the supreme court may consider the legislative intent. In looking at work related injuries the courts look to the intended purpose of the legislative act and in evaluating workers' compensation coverage the courts have interpreted the act as:

(1) It seeks to ensure that the cost of industrial injuries will be part of the cost of goods rather than a burden on society;

(2) to guarantee prompt, limited compensation for an employee's work injuries, regardless of fault, as an inevitable cost of production;

(3) to spur increased industrial safety, and;

(4) in return, to insulate the employer from tort liability for his employees' injuries.

The Supreme Court stated that:

The Act intends comprehensive coverage of injuries in employment. It accomplishes this goal by defining "employment" broadly in terms of "service to an employer" and by including a general presumption that any person "in service to another" is a covered "employee." The express exclusion of "independent contractors" is purposeful, of course, and has a limited but important function. It recognizes those situations where the Act's goals are best served by imposing the risk of "no-fault" work injuries directly on the provider, rather than the recipient, of a compensated service.

The California Courts have also considered a six-factor test developed by other jurisdictions which determine independent contractorship in light of the remedial purposes of the legislation. Besides the "right to control the work," the factors include:

(1) the alleged employee's opportunity for profit or loss depending on his managerial skill;

(2) the alleged employee's investment in equipment or materials required for his task, or his employment of helpers;

(3) whether the service rendered requires a special skill;

(4) the degree of permanence of the working relationship; and

(5) whether the service rendered is an integral part of the alleged employer's business.

The importance of any factor depends on the totality of the circumstances. Every employer attempting to establish an independent contractor agreement, must at the very least address each of these factors to minimize the risk of liability. Complying with each of these factors does not necessarily mean total immunity, but it is a strong start and a much better defense than no effort at all. Any employer's intent to avoid workers' compensation insurance costs or overtime pay will more likely than not manifest itself in any such agreement, if these factors are not considered.

The definition of independent contractor also varies depending on the circumnstances and on whether there is a specific agency looking at the relationship between the employer and the independent contractors. The IRS has a different approach and emphasizes different factors, as does the workers' compensation agency, and so does the California Industrial Welfare Commission.