As employers look for
ways to cut costs, one method that often comes to mind is to use independent contractors
rather than employees. You don’t have to provide independent contractors with
expensive employee benefits or overtime pay, cover them for workers’
compensation, or pay employment taxes. But as a new case shows, you’d better be
certain that you’ve classified those workers correctly, because mistakes can
have expensive consequences.
Company Challenges EDD
Assessment
A group of courier
companies—collectively called Sonic—employed drivers to deliver packages for
businesses. The drivers were classified as independent contractors, and Sonic
issued them IRS 1099 forms reflecting their annual compensation. Sonic required
drivers to sign an independent contractor agreement.
Eventually, however, the
California Employment Development Department (EDD) assessed Sonic for $617,328
plus interest, based on Sonic’s failure to withhold taxes and make unemployment
tax contributions. The assessment included a 10 percent penalty as the Unemployment
Insurance Code authorizes. Sonic paid up but then sued the EDD for a refund,
arguing that the assessment was in error because the drivers were independent
contractors.
The trial court sided
with the EDD, finding that the drivers were employees, particularly because
Sonic retained necessary control over the drivers’ work. Sonic appealed, and
now a
appeals court has upheld the lower court’s ruling.1
Employer Had Right to
Control
The extent to which the
employer has the right to control the details of a worker’s service is the key measure
of whether someone is an employee or independent contractor; the greater the
right to control, the more likely the person is an employee. Other, secondary factors
may also have a bearing on status, including the nature of the work and the
overall arrangement between the parties.
In this case, said the
appeals court, there was substantial evidence that Sonic controlled the
drivers’ work. For example, many Sonic drivers worked a regular schedule and
drove regular daily routes, factors consistent with employee status and reflect
employer control. This was true even though drivers themselves determined when
they took breaks and vacations. The court rejected Sonic’s claim that it lacked
control because the drivers chose their actual routes and speed of delivery.
The court pointed out that the simplicity of the work—taking a package from
point A to point B— made detailed supervision or control unnecessary.
The HR Management & Compliance Report: How To Comply with California Wage & Hour Law, explains everything you need to know to stay in compliance with the state’s complex and ever-changing rules, laws, and regulations in this area. Coverage on bonuses, meal and rest breaks, overtime, alternative workweeks, final paychecks, and more.
Key Factors Point to
Employee Status
The following secondary
factors also supported a conclusion of employee status, the court said:
• Drivers made no major
investments in equipment or materials; Sonic required only that they had their own
vehicles and insurance.
• Many of the drivers
delivered for Sonic for years. Lengthy tenure tends to be inconsistent with
independent contractor status.
• The drivers performed
an integral and entirely essential aspect of Sonic’s business.
• Drivers had to use
Sonic’s forms to be paid and were paid on a regular, biweekly schedule.
• Drivers were
encouraged to wear Sonic uniforms and were provided with Sonic ID badges and
vehicle placards.
• Deliveries were made
for Sonic customers, not the drivers’ personal customers.
• Sonic set the delivery
rates, billed customers, and collected payments.
Know the Risks
Erroneously classifying
workers as independent contractors can lead to big problems, including the tax consequences
highlighted in this case. There are other risks, too. Misclassification means
you may not be covering the workers for workers’ compensation. What’s more, if
a worker is actually a nonexempt employee and you haven’t been paying overtime,
you could get hit with a wage and hour suit. If you have misclassified an
entire department or category of workers, the costs could multiply quickly.
To avoid disputes, be
sure to carefully analyze the degree of control you have over a person’s work before
treating the person as an independent contractor.
_
1 Air Couriers Int’l v.
Employment Development Dept.,
Court of Appeals (Dist. 3) No. C050978, 2007