To IC or not to IC. That is the Question.

I’ve seen a lot of articles about Kevin Ogar’s horrific injury floating around the web. For those of you that don’t know, an elite CrossFit athlete, Kevin Ogar, was competing at the OC Throwdown last week. He was attempting a heavy snatch, couldn’t complete the movement, bailed, and dropped the bar. Bailing on a lift is common in CrossFit, especially when the lift is heavy. However, when the bar dropped, it bounced against the stacked weight plates behind him, hit him in the back, and injured his spine. It is unknown whether Kevin will regain use of his legs, although reports have indicated permanent paralysis.

Without going into the amount of backlash CrossFit is likely to receive (and already receiving) regarding the dangers of the sport, I’d like to first point out that Kevin has received immediate, immense support from the CrossFit community. Kevin, like many elite CrossFit athletes, was uninsured. He suffered a devastating spinal injury, so surgery was naturally required. Almost immediately following reports of his injury, a fund was established to help pay for his surgeries, and over $100,000 has been raised already. This is a large part of what I love so much about CrossFit: the community. We support one another, we cheer each other on, and we lean on each other when things get tough.
After learning about Kevin’s tragic injury, it got me thinking about employer classification of their workers. I know it seems like that connection came completely out of left field, but hear me out. Had Kevin been a full-time employee for a business, there’s a good chance he would’ve been offered some kind of healthcare option under the new Affordable Care Act guidelines. However, Kevin was an independent contractor and part time employee. Thus, like many Americans, he was uninsured. Now, I’m not saying Kevin was improperly classified as an independent contractor. But, it definitely got me thinking about how employers decide to classify their workers as independent contractors or employees. Many business owners simply choose to classify their workers as independent contractors due to the benefits associated with doing so. However, mis-classification of an employee as an independent contractor can cause a legal nightmare for an employer.
Benefits to Employers and the Regulatory Authorities in Charge:
Many of you do not know why classifying a worker as an independent contractor is such an attractive option to employers. First off, there are a number of taxes employers can avoid paying to the government if their workers are classified as independent contractors (or “ICs” to keep it simple). Employing an IC means an employer is not responsible for paying payroll taxes, the minimum wage or overtime, complying with other wage and hour law requirements such as providing meal periods and rest breaks, or reimburse their workers for business expenses incurred in performing their jobs. Additionally, employers do not have to cover independent contractors under workers’ compensation insurance, and are not liable for payments under unemployment insurance, disability insurance, or social security. Naturally, this looks really good to a business owner who is trying their best to keep overhead low, thus maximizing as much cheddar in the business coffers at the end of the day.

Figuring out whether a worker is an IC or employee (or “EE”) is not as easy as looking to a code section or regulation for answers. There is really no one-size-fits-all approach in determining whether a worker should be classified as an IC or EE. In California, there are several state agencies involved with determining independent contractor status. The Employment Development Department (EDD) is concerned with employment-related taxes, and the Division of Labor Standards Enforcement (DLSE) focuses on compliance with wage, hour, and workers compensation insurance laws. Other agencies such as the Franchise Tax Board (FTB), Division of Workers’ Compensation (DWC), and the Contractors State Licensing Board (CSLB), also have regulations or requirements concerning independent contractors. Because there are so many entities involved, a worker could be considered an IC by one regulating agency, and an EE by another. It is therefore important to understand how most courts in California approach classifying workers.
Economic Realities Test:
In dealing with any matter where classification of a worker is at issue, the DLSE will first begin by presuming the worker is an employee per Labor Code Section 3357. This presumption is rebuttable, meaning an examination of the facts is necessary for an ultimate determination as to whether a worker is an EE or IC. The California Supreme Court established the “economic realities” test in the case of S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341. Of the factors evaluated by the Court, the most significant in applying the economic realities test is the degree of employer control over the work performed and the manner in which it is performed. Very simply put, the more control an employer has over the work itself and how work is done, the more likely the worker will be considered an employee. There are a host of other factors a court will examine when applying the economic realities test, depending on the issues involved. But I will save you all the headache of making you read them here.
You’re probably thinking, “As long as I don’t control work details, I should be fine.” And you MIGHT be right. However, in the case of Yellow Cab Cooperative v. Workers Compensation Appeals Board (1991) 226 Cal.App.3d 1288, the Court found that an employer-employee relationship existed, even where there is an absence of control over work details, if (1) the principal retains pervasive control over the operation as a whole, (2) the worker’s duties are an integral part of the operation, and (3) the nature of the work makes detailed control unnecessary.
The application of this test and evaluation of these factors are not easy, and I strongly suggest seeking legal counsel before classifying your workers as ICs willy-nilly. A good attorney can help evaluate your business and determine whether it’s acceptable to treat your workers as ICs, or if they should be classified as EEs. They can also help you draft independent contractor and employment agreements, which can be very helpful to an employer.
Just remember — because employers are able to avoid many state and federal tax payments as a result of classifying workers as ICs, the IRS and state government construe IC classification narrowly. What does that mean for you if you’ve improperly classified your EEs as ICs? Well, let’s just say the government always gets its piece, and you could be looking at some pretty hefty penalties imposed by both your state and the IRS. Let’s not forget you could also be looking at potential lawsuits brought by disgruntled workers.