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Other Laws that Impact Independent Contractors

Though retaining true independent contractors can allow you to avoid many employment obligations, the following concerns require your attention.

Harassment and Independent Contractors: California’s Fair Employment and Housing Act (FEHA) protects independent contractors fromharassment. FEHA makes it illegal to harass an independent contractor, defined as any “person providing services pursuant to a contract,” on the basis of race, religious creed, national origin, ancestry, physical disability, mental disability, medical condition, marital status, sex, age or sexual orientation.

Wages, Hours and Independent Contractors: Because the state wage and hours regulations apply only to employees, the state Labor Commissioner has no jurisdiction to order wage payments to independent contractors. Therefore, the true nature of the relationship between a wage claimant and a purported employer is addressed by the state Labor Commissioner when the issue of independent contractor status is raised in a wage claim or audit proceeding. Traditional common-law principles have been used by the state Labor Commissioner’s hearing officers and auditors in making determinations.

The consequences of misclassifying an employee as an independent contractor in a wage or hour context include, but are not limited to, liability for unpaid wages for a period of up to three years, including potential overtime pay. If employee status is found, the failure to pay all wages due every pay period can result in penalties of $100 to $200 per employee per pay period, and up to 25 percent of the wages not paid to each employee for each pay period. Moreover, employers making lump sum payments to individuals improperly classified as independent contractors may violate the statutory obligation to provide itemized wage statements to employees each pay period, and become subject to additional civil penalties of $250 per employee for the first violation and $1,000 per employee for each subsequent violation.

In addition, failing to pay all wages due and owed to a terminated employee who was improperly classified as an independent contractor in a timely fashion can subject you to penalties of up to 30 times the employee’s daily wage without regard to the actual amounts of unpaid wages.

Benefits and Independent Contractors:  Independent contractors typically are ineligible for benefits offered to employees, such as health insurance, vacations and retirement plans. However, an employee misclassified as an independent contractor could retroactively be entitled to those benefits under a Ninth Circuit Court of Appeals decision. In that case, the IRS conducted an audit of freelancers hired as independent contractors by Microsoft Corporation and found them to be employees. These employees brought suit and were found to be eligible for Microsoft’s retirement and stock option plans for the period they were misclassified. The court reached this decision despite the fact that the freelancers:

• Signed contracts expressly agreeing to work as independent contractors
  
• Received higher wages than regular employees in lieu of fringe benefits
  
• Were paid through the accounts receivable department after submitting invoices
  

Workers’ Compensation and Independent Contractors:  Misclassification of employees as independent contractors can result in denial of workers’ compensation coverage, penalties for failure to provide workers’ compensation, and payment of workers’ compensation premiums from the date of hire of the independent contractor(s).

If you have misclassified an individual as an independent contractor and have not provided him/her with workers’ compensation coverage, you can be held liable for civil tort liability to the individual and to third parties who are injured as a result of negligent acts by the misclassified individual during the course of employment. In addition, if you fail to secure workers’ compensation insurance for your employees, you are subject to all of the following potential liabilities:

• Workers’ compensation claims and lawsuits filed by injured employees
  
• A penalty of up to $10,000 payable to the state
  
• An additional penalty of 10 percent of any workers’ compensation benefits recoverable by the injured employee
  
• Attorneys’ fees
  
• Liability for Injuries to an Independent Contractor’s Employee
  

An independent contractor’s employee who is injured by the subcontractor’s negligence cannot sue the party who hired the independent contractor. In Toland v. Sunland Housing Group, Inc. , the California Supreme Court held that it’s unfair to subject the hiring party to civil litigation when the independent contractor, who had control over the work, can’t be subjected to civil litigation because of the rule ofworkers’ compensation exclusivity. Similarly, in Camargo v. Tjaarda Dairy , a dairy was not liable for injuries to a trucking company’s employee on the theory that the dairy negligently hired the trucking company. The court found the dairy had exercised no control over the work performed by employees of the trucking company whose liability is limited by workers’ compensation law. 

Liability for injuries to a contractor’s employee outside workers’ compensation can be assessed against a hiring party where that party provides faulty equipment that causes injury to the contractor’s employee or where the hiring organization retains control of safety procedures in the work environment and is negligent in exercising that control.