Another Reminder to Exercise Caution Before Classifying an Employee as an “Independent Contractor”

A recent decision provides another reminder of the reasons why California employers should proceed with caution before entering “independent contractor” agreements with relatively unskilled workers who are not truly independent. In evaluating whether a worker is misclassified as an independent contractor instead of an employee, courts look to see whether, among other factors, the worker controls the means and manner of performing work, has made a substantial investment in a truly independent business, remains free to hire others to perform the work, provides his or her own tools and equipment, and is paid by the job instead of by the hour. Since proper classification of a worker turns on the specific facts and circumstances of each case under a multi-factor test, these claims are costly to defend and even more expensive to lose.

Under California law, in addition to (1) the right to control work details, secondary factors that may be relevant to determining whether a worker is an employee or independent contractor include: (2) whether the worker performing services is engaged in an occupation or business distinct from that of the hiring principal, (3) the kind of occupation, with reference to whether, in that locality, the work is typically performed under the direction of the principal or by specialist without supervision, (4) the degree of skill required in the particular occupation at issue, (5) whether the principal or worker supplies instrumentalities, tools, and place of work for person doing work, (6) the length of time for which services are to be performed, (7) the method of payment, e.g., by time or by job, (8) whether or not work being performed is part of the regular business of the principal, and (9) whether or not parties truly believe they are creating relationship of employer-employee. These individual factors cannot be applied mechanically as separate tests. Instead, they are intertwined, and their weight depends often on the particular combination presented by each individual case.

In Ruiz v. Affinity Logistics Corp., a transportation subsidiary of Sears hired unskilled furniture delivery drivers that it classified as “independent contractors” through an elaborate scheme that included requiring drivers to obtain fictitious business names and business licenses, to open separate commercial checking accounts, sign “independent contractor agreements,” and enter written “lease” agreements for delivery trucks – although in reality Sears advanced all lease and maintenance costs to the drivers, and deducted those advances from drivers’ paychecks.

Ruiz involved a federal class action filed by Sears furniture delivery drivers who claimed to have been misclassified as independent contractors. They sought recovery of sick leave, vacation, holiday and severance wages, and worker’s compensation insurance premiums. The District Court found the drivers to be independent contractors, relying heavily on the fact that drivers technically owned separate businesses, which they remained free to expand by hiring employees and leasing more trucks. The District Court also found that drivers performed delivery and installation work that was unsupervised and required substantial skill. On appeal, however, the Ninth Circuit Court of Appeal in Ruiz reversed and found the drivers to be misclassified employees.

Regarding the most important element (i.e., the right to control the manner and means by which the work is performed), the Ruiz court noted that Sears required all drivers to follow a detailed procedures manual, work the days and routes dictated by Sears, request any time off in advance, wear Sears uniforms, comply with detailed grooming standards, attended mandatory morning meetings, and report on their progress to Sears supervisors throughout the day. Despite the fact that drivers had “leased” their trucks from Sears, they were required to leave them in the Sears yard overnight and prohibited from driving them home at night or using them to make deliveries for other companies.

Regarding some of the secondary factors, the Court of Appeal in Ruiz disagreed with the District Court, noting that drivers did not actually own distinct and separate businesses; rather, Sears had forced drivers to create separate businesses that “were in name only.” Although some drivers hired helpers as secondary drivers, that was only because Sears had required them to do so, and retained control over that hiring process. The nature the work (driving/delivery) was unskilled, which weighed in favor of employee status. Notwithstanding their “lease” of trucks, in reality, it was Sears that supplied drivers with all of their work tools – e.g., trucks, cell phones, and delivery supplies. Finally, the work performed by the delivery drivers was part of the core business of the Sears transportation subsidiary that hired them.

The consequences misclassification include not only liability to the misclassified employees, but also the specter of state/federal tax liability, interest, penalties, and liability for failing to maintain workers’ compensation coverage for the misclassified workers. State and federal agencies have recently stepped up their efforts to investigate and prosecute misclassification of California workers. Reflecting its disdain for “rampant misclassification in every employment sector in California,” the California Legislature in 2012 enacted Labor Code § 226.8, which declares the “willful” misclassification of an individual as an independent contractor to be unlawful, and subjects violators to stiff civil penalties up to $25,000, the assessment of civil and liquidated damages, and to disciplinary action against their professional licenses.

The case is Ruiz v. Affinity Logistics Corp. (9th Cir., June 16, 2014, 12-56589) 2014 WL 2695534.

An employer with questions about wage & hour, or other employment law, issues may contact either Jim Parton jparton@partonsell.com or Frank Conway fconway@partonsell.comwith the firm’s labor and employment practice.

A recent decision provides another reminder of the reasons why California employers should proceed with caution before entering “independent contractor” agreements with relatively unskilled workers who are not truly independent. In evaluating whether a worker is misclassified as an independent contractor instead of an employee, courts look to see whether, among other factors, the worker […]