One of the most persistent problems that Bay Oak Law is seeing is the hiring of independent contractors. For a long time, independent contractors were a convenient way for businesses to get work done without the paperwork of hiring an employee. In California, those days have largely gone the way of flip phones and fax machines.

Independent contractors were cheaper to businesses, but caused far more expense to the taxpayers. Independent contractors are not covered by workers' compensation, and generally do not qualify for unemployment benefits (both of which are paid for by employers). That means that taxpayers are more likely to have to take care of independent contractors who are unable to work, through either Medi-Cal or welfare payments. Independent contractors that do make money are also less likely to pay taxes, thereby further adding to the burden of taxpayers.

Businesses need to learn both their 1-2-3s and their ABCs on independent contractors.

Number 1: Do not trust someone who says that they’ve done the job as an independent contractor in the past. The law does not care whether they agreed to it, or whether they have done so in the past. In fact, we have seen cases where people have taken jobs as independent contractors for a short period of time, and then sought tens of thousands of dollars.

Number 2: The stakes are far more than just a little to cover taxes, Social Security, and Medicare. Civil penalties can multiply the costs to five times the original cost, or more. If attorneys’ fees are awarded, that could further multiply the cost. If that is reduced to a judgment, the sheriff’s office can empty your bank accounts and take your accounts receivable—and continue doing so until the judgment is fully satisfied. That could well end your business.

Number 3: If you have any responsibility for payroll, Cal. Labor Code § 558.1 makes you personally liable for certain wage & hour violations. If the business goes out of business, you can be left with liability. See Atempa v. Pedrazzani, 27 Cal. App. 5th 809, 815 (2018) (manager liable for $31,074 in civil penalties and $315,014 in attorneys’ fees, even if business goes bankrupt).

In Dynamex v. Superior Court, 4 Cal. 5th 903 (2018), the California Supreme Court laid out a straightforward way to avoid those numbers above: follow these ABCs in hiring an independent contractor:

  1.  The worker must be free to do the job as the worker sees fit, without direction or control from the hiring business.

  2. The work being done is outside the usual course of the hiring company’s business.

  3. The worker is regularly engaged in an independently established trade, occupation or business of the same nature as the work being performed under contract.

In practical terms, these ABCs mean that, with very few exceptions, no business can hire an individual as an independent contractor; at best, the business can hire another business, which may be a sole proprietorship, but not an individual. The hiring company needs to collect evidence that the potential independent contractor has a business license, and is doing the same sort of work for other customers. It also means that the hiring company has to have a hands-off approach to how the work is done. This is to protect the independence of the independent contractor, which should have the experience in this sort of business that the hiring company does not. If the hiring company already does this sort of work, then it is no longer an independent contractor relationship.

Independent Contractor Exemptions. Under Cal. Labor Code § 2750.3, Some professions are allowed to act as independent contractors. These include some licensed professionals like doctors, lawyers, engineers, accountants, and the like, registered securities broker-dealers or investment advisers, direct salespeople, and commercial fishermen on American vessels. However, even these exemptions have their limitations, and getting it wrong can be enormously expensive. When in doubt, check it out with your friendly lawyer.