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California Employment Law Commentary on Issues Facing California Employers

State Determines Workers Are Independent Contractors, then Penalizes Employer for Not Treating Them as Employees

Posted in Employment Litigation, Wage and Hour

Many employers in California feel like the deck is stacked against them. But as I’ve written before, some have a stronger basis for that conclusion than others. Consider the plight of poor Happy Nails, a chain of nail salons. In 2001, they hired a consultant to help them structure their business so that the cosmetologists working there were independent contractors, not employees.

Not so fast, said the Employment Development Department. In 2004, the EDD assessed penalties against Happy Nails for not making unemployment insurance contributions on behalf its cosmetologists (which would only be owed if they were employees). Happy Nails challenged the assessment and, after years of administrative wrangling and hearings and an appeal, it got a determination that the cosmetologists were, in fact, contractors.

Then in 2008, along comes the Division of Labor Standards Enforcement. It assesses a penalty against Happy Nails for not giving its employees itemized wage statements. Hold on, said Happy Nails. Another state agency determined that these aren’t employees. They’re independent contractors. So they don’t get wages or itemized wages statements. The DLSE responded, We don’t care what that other agency said. We say they’re employees.

Happy Nails requested a hearing to challenge the penalties and submitted a brief saying that it had

already spent hundreds of thousands of dollars, and borne the burden of years of administrative proceedings, to determine that [its] [c]osmetologists are not employees.

At the hearing, Happy Nails submitted the same evidence that persuaded the EDD that the workers were contractors. But this time the hearing officer ruled the workers were employees. What did the hearing officer say about the prior contrary ruling from the EDD? Nothing at all.

Happy Nails asked the superior court to review the decision and, after another hearing, the court sided with the DLSE. Happy Nails next asked court of appeal to review the issue and, finally, got a 3-justice panel to tell the State that it can’t have it both ways. The appeals court pointed out that the same issue had already been litigated between essentially the same parties and that, based on the legal doctrine of collateral estoppel, there was no reason to relitigate it.

This decision (pdf) came out today, so there’s no word yet about whether the DLSE intends to take this all the way to the Supreme Court (exceedingly unlikely). And it probably isn’t even worth pointing out that every employer in California is expected to make these independent contractor/employee distinctions that the enforcing agencies and courts can’t even agree on.

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