Independent Contractors

Guest blog post by Mikella Wickham:

They say location is everything in business.  How about classification of workers?

In certain industries, workers have a unique combination of specified skills and

Fit people working out
Copyright: wavebreakmediamicro / 123RF Stock Photo.

relative freedom to do their job.  As a result, small businesses are stuck between a rock and a hard place when deciding whether their workers are employees or independent contractors.  Of the many small businesses that want to pay their workers fairly and legally, it is becoming harder to do so without going out of business altogether.

Take fitness companies, for example.

Fitness instructors are not the average employees.  They may have input on their schedules (because they only want to work mornings or weekends).  They may work at several different studios, or work more than one job.  Often they teach in their own style, and even impact how many customers attend the classes.  Very often customers are loyal to a studio based on their rapport with a particular instructor.  Does the fitness company pay that person as an employee or as an independent contractor?

Let’s say the employer pays the instructor as an employee, on an hourly basis.  That worker becomes much more expensive for the business because she is covered by workers’ compensation insurance, gets paid sick leave, is paid at least the minimum wage (which keeps going up), and gets overtime, meal breaks and paid rest breaks.  Given all of that, how does the employer incentivize the instructor to bring more customers in the door to offset the additional costs incurred?

Alternatively, if a company pays a fitness instructor as an independent contractor (as many do), but still controls aspects of what the instructor does (such as what she wears, the music she plays, or the moves she teaches), it risks a misclassification claim.  Defending such lawsuits can mean death to a small business.

With no law designating a “dependent contractor” middle ground category, businesses are left to choose from a pick-your-poison set of options.

Standing next to larger brand name fitness companies, smaller fitness companies who can afford to pay employees well, or eat losses at smaller studios for the larger corporate good, can find themselves disadvantaged in a David and Goliath battle to simply have a place in the market.

As we have suggested, perhaps the law will carve out an exception for businesses in this category.  The future will tell.  In the meantime, small businesses have a tough decision to make: pay up now, or, perhaps, pay more later.


Mikella P. Wickham is a summer associate, based in the firm’s Los Angeles office.

Potluck

Attention hospitality professionals.  Come join me and Sahara Pynes at the Potluck Conference on February 20-21st at the Hudson Loft in downtown Los Angeles.

This new conference is for professionals in the evolving hospitality industry, including hotels, restaurants, venues for private dinners, off-site catering, pop-ups and underground supper clubs.  It is open to innovators from all walks of the hospitality industry (chefs, designers, producers, venue operators) to share a forum of conversation, workshops, and education.

I will be providing a keynote address on Tuesday, February 21st on the Top 10 Trending Topics in Hospitality HR.  Sahara will follow with a session on Employee Documentation from A to Z.

Check it out.  You can register here.  We hope to see you there!

I am looking forward to the California HR Conference sponsored by PIHRA (Southern California’s SHRM) coming up on August 29-31st in Long Beach.  If you haven’t registered, take a look at the three day list of speakers and networking events.

2016 California HR Conference

I will be speaking on the Top 10 Trending Issues for California HR on Monday, August 29th at 1:30 pm.  The session will provide a fast paced summary of the hottest issues facing HR professionals in California, including essential and practical tips for compliance.  I will cover many of the issues we have blogged about here, including the Fair Pay Act, joint employment, independent contractors, wage-and-hour trends, local minimum wage ordinances, PAGA considerations, and more.  If you attend, you will get an overview of the key legal issues facing California HR professionals in one session.

I hope to see you there!

If you are a professional in the hospitality industry, please join me for a presentation on the top Ten Legal Issues Facing HR Hospitality Professionals in 2016.   The event is sponsored by the Los Angeles Hotel HR Association and will be held on Thursday, February 25th at 6:00 pm at the Hollywood Roosevelt Hotel.  You can find out more information about it here

Not only will I review new laws and legal issues, but I will provide practical advice and specific guidance on how to remain compliant.  Topics will include:  the Fair Pay Act, other types of wage claims, minimum wage ordinances (including the LA Hotel Minimum Wage Ordinance), updates on PAGA (the Private Attorney General Act), joint employment, and independent contractor status.  If you work in Human Resources, Risk Management, Operations or Administration in a hotel in Los Angeles you won’t want to miss it.  I hope to see you there!

Copyright: iqoncept / 123RF Stock Photo
Copyright: iqoncept / 123RF Stock Photo

 

 

I’ve just ordered my family’s holiday cards and started making my gift lists.  I know that the holidays will creep up on us quickly and before I relax with a gingerbread latte, there is work to be done.  I wanted to share my list of the five HR-related to-dos California employers should consider before the end of this year.

Year-end HR To-Do List
Copyright: mexrix / 123RF Stock Photo
  1. Review Your Independent Contractors: This year’s numerous court decisions and administrative guidelines make it virtually impossible for companies to categorize workers as independent contractors. Now is a good time to review who you are still paying via Form 1099. January 1 is the best time to convert misclassified independent contractors to W-2 employees so that tax paperwork will be as clean as possible and hopefully not raise any concerns. When in doubt, classify workers as employees and talk to your attorney to help craft the appropriate communication.  For classification criteria if you choose to continue to work with contractors, I invite you to read a Law360 article written by my colleague Colin Dougherty, entitled “Nothing New in DOL Worker Misclassification Memo.”
  2. Ensure Employees Are Properly Classified: While the DOL’s proposed amendments to increase the salary threshold for employee overtime exemptions are usually ignored by CA employers, if these amendments pass, they will indeed impact many CA workplaces. So, it is worth taking a look at questionably classified employees whose salaries are below the proposed threshold. Effective January 1, 2016, this amount in California will increase to approximately $800 per week ($41,600 per year) when California’s minimum wage increases to $10.00 per hour. The new federal proposal raises that amount to $970 per week ($50,440 annually). There is also a proposed increase in the “highly compensated” exemption from $100,000 to $125,148 annually. You may have a suspicion that some of your employees within this salary band should be earning overtime, in which case, the new year is as good a time as any to minimize overtime liability and reclassify those employees.
  3. Organize Personnel Files: Consider this a second chance at spring cleaning. At the end of each year, take the time to organize your employee files and I-9 Forms and separate the terminated employees from the active. Keep I-9 files separate from employee personnel files and maintain them for one-year post-termination. Keep terminated employee personnel files for three years after the date of separation.  Once that retention requirement has been met, grab the shredder.
  4. Review Your Paystubs: Why start another year wondering if you might get hit with the PAGA suits that are plaguing other California employers? Don’t assume your third-party payroll provider has it covered. Especially with the new reporting requirements on paid sick leave, best practices demand that accounting, human resources and payroll administrators are collaborating to ensure compliance. Luci Li recently posted a go-to list of what must be included on every employee’s regular wage statement.
  5. Analyze Compensation Practices: The California Fair Pay Act goes into effect January 1st so your policies and practices need to be in compliance. Evaluate employees by job duties, not title, to ensure men and women are compensated equally. If you find disparity, either fix it or be sure you can justify it. Jeff Polsky recently posted a rundown on the Fair Pay Act and what factors can legitimately be used to justify pay disparities.

Well, until the year-end close-out phone calls start rolling in, I think I’ll head over and get that latte… in a red cup, of course.

Labor laws are not keeping pace with the new economy.  Right now there are only two options for employers.

Option one is to hire employees, and comply with the myriad complicated wage-and-hour laws, including very strict rules about monitoring an employee’s work hours.  In California, an employer must ensure a non-exempt employee works no more than 8 hours per day (even if the employee wants to stay late one or two days and leave early another) or pay overtime.  Any time over 8 hours in one day must be paid at an overtime rate that must be calculated to include extra non-discretionary pay (such as commissions, service charges, and shift premium pay).  An employer must ensure meal breaks are taken (even if the employee prefers not to take them), and make sure they are taken before the end of the 5th hour of work.  Any lack of proof of compliant meal breaks (typically punch records) requires the employer to pay an extra hour of “premium” pay.  Both daily overtime and meal premium pay can blow up a business’ labor costs and put a large dent in what are often already slim profit margins.

Option two is to retain workers as independent contractors and have them agree (preferably in writing), that they are contractors and not employees.  Independent contractors are not entitled to overtime or meal premium pay.  They also aren’t covered by workers’ compensation and don’t get employee benefits (such as paid sick leave or employer-sponsored health care or unemployment benefits).  But independent contractors have freedom.  They can work hours as needed to achieve the scope of work agreed upon.  They have the opportunity for profit (by working efficiently) or loss (by working less efficiently).  And they can work for more than one employer and have a more fluid work/life balance.

The problem is that many jobs in the new economy do not fit neatly into either option.  The new rideshare technology is a prime example, but there are many others (including many types of semi-professional services, such as movers, tech/HR consultants, fitness instructors, hair stylists, etc.).  And with the DOL’s new guidance the federal government is now joining the California trend in going after both businesses who engage contractors, as well as individuals who work as contractors.  The goal?  Some might say to protect workers.  Others might say to ensure payroll tax revenue streams are intact.  Whatever the goal, retaining contractors to run an integral part of your business is just plain risky.

So what we need is an option three – dependent contractors.  A dependent contractor would be a worker who works exclusively (or semi-exclusively) for one business, but still retains the freedom to work flexible hours, to take a meal break when hungry, to accept or reject assignments, and to take time off when desired.  A dependent contractor would still be self-employed, but could avoid the rigid lifestyle that regulations require employers to impose on employees, and could work at their own pace without feeling the pressure to perform in an outdated 8 hour workday / five day workweek model.

As the cases about rideshare technology work their way through our state agencies and court systems, expect to hear more about this idea of dependent contractors.  Maybe the law will eventually catch up with the needs of businesses and the new generation of workers who want some freedom to redefine the work experience.  One can only hope.

 

Companies have a lot to lose if they misclassify employees as independent contractors. The affected workers can sue (individually or as a class) for any number of wage and hour violations. Employers can also get in trouble with the Internal Revenue Service, the Employment Development Department, the US Department of Labor, the Division of Labor Standards Enforcement, the Franchise Tax Board, and others.

So it would be nice if there was a clear test that could be applied in a straightforward manner. But there isn’t. The Employment Development Department, for example, uses a test that includes three “significant questions,” three additional questions, and seven questions that address “additional factors.”

Now, as noted by Kat Greene at Law360 (subscription required) a federal judge here in San Francisco is chiming in on the unfortunate state of the law. The Honorable Vince Chhabria of the US District Court, in addressing whether certain drivers qualify as independent contractors, issued a decision saying that the test applied by California courts “provides nothing remotely close to a clear answer.” So the issue will go to a jury that, according to Judge Chhabria, “will be handed a square peg and asked to choose between two round holes.”

Welcome to California employment law in 2015: potentially disastrous penalties for violating laws that are vague and hard to apply.

Copyright:  / 123RF Stock Photo
Copyright: / 123RF Stock Photo

Takeaways:

  • Pay close attention to these independent contractor determinations. Recognize that different agencies use different tests.
  • Get legal help if you need to.
  • Consider moving your operations elsewhere. Qatar maybe. Please turn out the lights if you’re the last to leave.

 

Guest post by Los Angeles associate, Connie Chen.

Since Governor Brown signed AB 1897 on September 28, 2014, many businesses are likely wondering whether the new law, California Labor Code § 2810.3, will increase their liability when they subcontract work. The answer depends on whether the work is within the company’s usual course of business.

The new law requires a business to automatically share liability with a “labor contractor,” such as a temporary staffing agency, if the agency fails to pay wages or provide workers’ compensation insurance to its employees who are assigned to work at the business. Cal. Lab. Code § 2810.3(b). Before this legislation, temporary employees had the burden of proving that the businesses they were assigned to were “joint employers” with the staffing agencies.

However, the new law does not impose liability on a business for using an independent contractor “other than a labor contractor,” nor does it change the definition of independent contractor. Labor Code § 2810.3(o). So what does that mean?

Labor contractor” is defined as an individual or entity that supplies workers to perform labor “within the client employer’s usual course of business.” Subsection (a)(3). The phrase “usual course of business” is defined as “the regular and customary work of a business, performed within or upon the premises or worksite of the client employer.” Subsection (a)(6).

For example, if a restaurant contracts with a plumbing company to send workers to fix a clogged pipe, the plumbing company would not be a “labor contractor” within the statute, since the restaurant is not in the business of providing plumbing services. The independent contractor exception would apply so long as a bona fide independent contractor relationship exists.

This new law is further reason for businesses to ensure that a bona fide independent contractor relationship exists with each of their contractors/vendors. Moreover, businesses should thoroughly vet their staffing agencies to ensure they are reputable and comply with California wage and hour laws. This blog’s earlier advice is now even more sound: seek to have your staffing agency indemnify your business for any loss or harm (including attorneys’ fees) arising from claims by the agency’s employees. If a staffing agency refuses to sign such a provision, evaluate whether or not to enter into a contract with that agency, and/or to continue to use temporary employees.

 

 

 

From the employer’s perspective, the only way to truly “win” an employment case is to avoid it in the first place. We litigators love the thrill of gettting a judge, arbitrator, or jury to decide in our client’s favor. But it can be awfully expensive to get to that point. So without further ado, here are ten commandments for avoiding employment litigation in California.

I. Thou shalt pay employees for all hours worked and provide them their breaks. It’s hard to think of a large employer in California that hasn’t spent gobs of time and money litigating this issue.

II. Thou shalt not treat nonexempt employees as exempt. This is another wage and hour issue that has given rise to thousands of class action claims.

III. Thou shalt not treat employees as independent contractors. Multiple government agencies are reviewing this issue in an effort to collect unpaid taxes.

IV. Thou shalt engage disabled employees in the interactive process. This is one of the hot areas in employment litigation. Failure to comply is, by itself, a violation of the Fair Employment and Housing Act.

V. Thou shalt pay attention to the unique legal requirements of the localities thou operates in. Following federal law isn’t enough. Even following California law isn’t enough if you’re operating in a locality, like San Francisco, with its own requirements.

Moses with the Ten Commandments VI. Thou shalt train thy managers to comply with applicable laws. Having the best policies in the world won’t protect a company if its managers don’t know how to implement them or whom to turn to with issues. This is especially true for harassment training (which is mandatory in California for employers with 50 or more employees).

VII. Thou shalt properly document the steps thou takes. I completed an arbitration last week that, because an issue went up on appeal, took place four years after the decisions in question. Notes of key conversations are critical in these situations.

VIII. Thou shalt require employees to waive class actions and arbitrate disputes. The law is now clear in California that, with an appropriate arbitration agreement, you can require employees to waive their right to class-wide relief. There are still open issues regarding collective actions under California’s Private Attorney Generals Act, but protection against class actions can still be of great value.

IX. Thou shalt provide employees an up-to-date employee handbook.

X. Thou shalt stay up to date regarding ever-changing legal requirements. One way to do that is to subscribe to this blog.

Another way to avoid litigation is to consult an employment lawyer (like me or my colleagues) before making decisions that may result in litigation. It’s frustrating to see companies spend years and hundreds of thousands of dollars litigating issues that could have been avoided with a phone call. So next time you confront these issues, make the call!

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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