If you're a business owner, one of the many things you need to think about is how to classify your workers: Should they be considered employees or independent contractors? Can there be a mix? The answer will always depend on your unique circumstances, but it is true that, more often than not, most workers in most businesses would be considered employees in the eyes of the law.
When should a worker be considered an employee as opposed to an independent contractor?
There are several factors that the courts (or the state or the IRS) will look at when answering this, but no single factor is controlling by itself. Factors that tend to result in an employee classification are:
- When the worker's job is to do things that your business is in the business of doing (such as a person who is hired to wash cars at a car wash)
- When the business provides the worker with the tools and place to do the job
- When the business controls how the job is done
- When the business controls the worker's schedule
- When the worker is paid an hourly wage rather than a commission or per-job fee
- When the worker wears a uniform
- When there are several workers at the business who have the same job
- When the worker doesn't need unique skills to do the job
Why does it matter?
There are several important implications -- both to the business and the worker -- when it comes to how a worker is classified. A business does not have to undertake the burden of withholding payroll taxes from an independent contractor. Nor does a business have to carry workers' compensation insurance for independent contractors. Only employees are protected by California's labor laws, such as rules for minimum wage, overtime, and rest breaks; the same goes for anti-discrimination and anti-retaliation laws.
Can a business be penalized for wrongly classifying its workers?
Yes. From the government side, the state or the IRS can come after a business for failing to withhold and submit payroll taxes. From the worker side, a business can be sued for failing to pay overtime, paying less than minimum wage, or failing to offer rest and lunch breaks.