Independent Contractors - Approach With Caution

FedEx is still litigating its classification of its drivers as independent contractors. FedEx lost a case recently in California in Los Angeles and the court ruled the company owes 200 drivers $5.3 million in expenses.  In addition, the California Employment Development Department (EDD), which is responsible for collecting payroll taxes, assessed FedEx Ground owed more than $7.88 million in back payroll taxes because it also held the drivers were misclassified as independent contractors. The audit covered the period July 2001 to June 2004 and concluded that some of the drivers were properly classified as independent contractors, but found the “single-route” drivers were employees. 

As these cases illustrate, California employers need to approach the independent contractor classification very carefully.  If a worker is properly classified as an independent contractor it can save the company money and give the workers great flexibility.  However, misclassifying employees as independent contractors exposes the company large damages for unreimbursed expenses, unpaid overtime, back payroll taxes, and many other items.

For guidance on whether employers have properly classified its workers as independent contractors, the California Division of Labor Standards Enforcement (“DLSE”) provides an explanation of the “economic realities” test. The DLSE maintains that the most indicative fact determinative of whether a worker is an employee or an independent contractor depends on whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker both as to the work done and the manner and means in which it is performed. The DLSE also sets forth the other factors that are considered when determining an employee’s status:

  1. Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
  2. Whether or not the work is a part of the regular business of the principal or alleged employer;
  3. Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
  4. The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
  5. Whether the service rendered requires a special skill;
  6. 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;
  7. The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
  8. The length of time for which the services are to be performed;
  9. The degree of permanence of the working relationship;
  10. The method of payment, whether by time or by the job; and
  11. Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.

Further details about the DLSE’s position on who classifies as an independent contractor can be found here. The DLSE’s information provides a great starting point for employers to audit their classifications of employees, but each case may present different facts, and the economic realities test may change depending on the jurisdiction (i.e., civil court or an EDD assessment) and whether state or federal law is at issue.