Independent Contractors and Workers' Compensation

Are you an independent contractor or an employee? It's an important issue in labor law, because independent contractors aren't covered by the same protections as employees, such as hours and wages laws, anti-discrimination laws -- and workers' compensation.

There isn't a set definition of "independent contractor," but the State of California and the Internal Revenue Service (IRS) have devised systems for determining whether employers are correctly classifying workers as independent contractors and not employees.

Twenty Factors

Working from decisions arising from common law and administrative hearings, the IRS has compiled 20 factors to determine whether someone is working as an independent contractor or should be considered an employee.

Those factors include who sets the worker's hours, how the worker reports, payment method, availability of the worker's services to the general public, where the work is performed and whether the worker has more than one client.

The Division of Labor Standards Enforcement (DLSE) in California, which is concerned with whether the wage, hour and workers' compensation insurance laws apply to a worker, starts with the assumption that a worker is an employee, although this is subject to rebuttal. When further investigation is necessary, DLSE applies the "multi-factor" or "economic realities" test, with the most significant factor being whether the employer has the right to control the work of the person and the way it's done. Other factors, similar to the IRS checklist, are also considered.

A written agreement between a worker and an employer doesn't mean the worker is an independent contractor, and neither does it matter if the worker files taxes using a 1099 form.

Workers' Compensation

Under California Labor Code Section 3700, any business -- including non-profit -- with one or more employees is required to provide workers' compensation benefits for them. The coverage may also extend to anyone they hire to work for the company temporarily, such as a painter, roofer or cleaning contractor, if they're uninsured.

Businesses that aren't insured are subject to heavy penalties, including a stop order until coverage is obtained. If someone is injured at a business without insurance, the Uninsured Employers Benefits Trust Fund (UEBTF), a special unit within the Division of Workers' Compensation, may pay benefits to the injured worker, but it will pursue reimbursement from the uninsured employer through all possible means. In addition, stiff penalties are applied, including jail time.

Misclassification

An employer can also be fined by California's Workforce and Development Agency for "willfully misclassifying" an employee as an independent contractor -- from $5,000 to $15,000 per violation. The penalty increases if a pattern emerges. It's also unlawful to charge fees or make deductions from misclassified independent contractors.

If a reclassified employee loses his or her job and feels it's in retaliation by the employer, he or she can file a retaliation complaint with the Labor Commissioner's Office of the DLSE.

Keep in Mind

Being considered an employee rather than an independent contractor by the Division of Workers' Compensation or DLSE doesn't mean that definition will be applied at other state departments. The worker may not be eligible for unemployment benefits, for example, as the Employment Development Department (EDD) could still consider the worker an independent contractor.

Rules about workers' compensation vary from state to state as well, where there may be differences in the way independent contractors are defined. In a few states, businesses are not required to provide workers' compensation benefits -- though they still have financial responsibility for injured workers.

If you've been misclassified as an independent worker when you're actually an employee, and you're hurt on the job in California, you might be eligible for workers' compensation. But you may need an attorney to help with your claim, so that you can receive compensation you're entitled to without unnecessary delay.