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Brian E. Koegle: Agencies target businesses to generate revenue

It's the Law

Posted: June 4, 2009 10:25 p.m.
Updated: June 5, 2009 4:55 a.m.

It should come as no surprise to learn that the economy has been weak for many industries throughout California for the better part of the last year.

What may come as a surprise, however, is how many state administrative agencies are now coming up with creative revenue-generating systems designed to penalize employers for every wrong step at a time when profits are small, margins are thin and a five- or six-figure penalty assessment could crush a small business.

By many accounts, the number of Employment Development Department (EDD) assessment notices and Department of Labor Standards Enforcement (DLSE) spot audits has significantly increased in the last 12 months.

For years, both the EDD and DLSE regularly conducted investigations, and penalized employers, for non-compliance with state labor laws, wage orders and departmental policies and regulations.

But the number of employers being investigated, and subsequently penalized, seems to be on the rise in recent months.

It would appear that at least some of these investigations are being prompted by the agencies' need to self-fund in an era when state budget constraints have seen them endure mandatory furlough Fridays, cutbacks in support staff and a significant increase in claims by disgruntled former employees.

One of the most prevalent issues, from an employment standpoint, which both the EDD and DLSE have focused on recently, is the classification of independent contractors versus employees in small to mid-sized businesses.

Numerous industries - ranging from landscaping to salons to light industrial - that regularly use contractors in their businesses have been targeted by the administrative agencies.

Identifying who is, and is not, an independent contractor has proven to be a difficult proposition for employers, as well as the courts, in recent years.

The general proposition, pursuant to California law, is that someone performing services for your business is presumed to be an employee.

Only if the worker is able to satisfy certain criteria can he or she be taken out of that "employee" category and placed into the "independent contractor" classification.

For years, California courts focused on a 14-point objective test to determine whether a worker could be classified as an independent contractor.

While no single element of this test is determinative as to whether the worker is properly classified, the courts have expected employers to apply the test objectively and make a decision as to the worker's proper classification. The 14-point test includes:

n Whether the employer can fire the worker at will;

n Whether the worker is engaged in a distinct occupation or business;

n Whether the work is usually done under the direction of the employer or by the worker without supervision;

n The level of skill required in a particular occupation;

n Whether the worker supplies his own instrumentalities, tools or workspace;

n The length of time for which the services are to be performed;

n The method of payment, either by the time or a flat-rate, paid per job;

n Whether the work is a part of the regular business conducted by the employer;

n Whether the parties believe they were creating an employer-employee relationship;

n Whether the classification as an independent contractor is bona fide, and not a subterfuge to allow the employer to avoid designating the worker as an employee;

n Whether the worker holds himself out as having his own business and/or business license;

n Whether the worker has employees of his/her own;

n The worker's opportunity for profit or loss depending on his/her managerial skills;

n Whether the services provided is an integral part of the employer's business.

Notwithstanding this test, in 2006, one California court held that, "an employer-employee relationship will be found if the (employer) retains pervasive control over the operation as a whole, the worker's duties are an integral part of the operation, and the nature of the work makes detailed control [of the job duties] unnecessary."

As such, even if an employer can objectively determine a worker's status using the 14-point test, the court will also look to whether pervasive control is maintained by the employer when determining whether the classification is proper.

In addition to significant statutory penalties for misclassification of workers as independent contractors, employers may also face hefty back taxes, for a period dating back three years, and may be held responsible for both the employer and employee's portion of the state tax burden.

Tack on interest on the back taxes, add in administrative costs and penalties and the assessment for misclassification can easily exceed a six-figure sum for employers who misclassify several workers as independent contractors.

As the administrative agencies continue to increase their investigations (and, undoubtedly, the number of assessments and penalties that go along with those investigations), it becomes more important for employers to perform annual evaluations of all employees/contractors to determine whether they are properly classified.

This annual audit would be an excellent opportunity for business owners to sit down with competent employment and labor counsel to ensure compliance with the objective standards and the recent changes in the case law. Hopefully, that evaluation takes place prior to the day the EDD or DLSE comes knocking on your door.

Brian E. Koegle is an attorney with Poole & Shaffery, LLP, a full service business, corporate and employment law firm. He can be reached at (661) 290-2991. His column represents his own views and not necessarily those of The Signal. "It's The Law" appears Fridays and rotates between members of the Santa Clarita Valley Bar Association. Nothing contained herein shall be or is intended to be construed as providing legal advice.


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