There are many reasons employers prefer independent contractors over employees, including exclusion from many labor and employment related laws. However, if an individual is improperly classified as an "independent contractor," rather than an employee, the employer may end up with more than it bargained for. Employers should be constantly wary of the potential that an independent contractor may have slipped into the category of "employee."
Recently the 9th U.S. Circuit Court of Appeals examined whether a sales representative was an independent contractor, rather than an employee for purposes of liability under Title VII, the federal law that prohibits sex discrimination in employment. (Murray v. Principal Financial Group, 2010 DJDAR 11605). Patricia Murray was a "career agent" for Principal Financial Group. She sold Principal's products, including 401(k) plans, insurance and annuities.
Murray sued Principal for sex discrimination. Principal sought summary judgment claiming Murray did not have standing to sue under Title VII because the law only applies to applicants and "employees," not to independent contractors. The district court granted summary judgment in favor of Principal and Murray appealed.
The appeals court held that, for purposes of Title VII, a court should evaluate the hiring company's right to control the manner and means by which the end result or product is accomplished. The factors relevant to this inquiry include: whether the individual possesses special skills required for the project; whether the individual supplies his or her own tools; whether the individual works from a location other than that of the hiring party; the length of the relationship between the parties; the extent to which the hiring party can assign projects to the individual; whether the individual has discretion over when and how long to work; whether the hiring party offers fringe benefits to the individual; and the manner in which the individual is taxed for his or her work with the hiring party.
In this case, Murray was free to operate her business as she saw fit, without day-to-day intrusions from Principal. She decided when and where to work, maintained and rented her own office, scheduled her own time off, and was not entitled to vacation or sick days. Murray was also paid on commission only, reported herself to the Internal Revenue Service as self-employed, and occasionally sold products other than those offered by Principal.
While Murray received some fringe benefits, had a long-standing relationship with Principal, and possessed an at-will contract, this was not sufficient to overcome the strong evidence that Murray was an independent contractor. Accordingly, Murray did not have standing to bring suit against Principal for allegations of sex discrimination under Title VII.
California employers are subject to both Title VII and the Fair Employment and Housing Act (FEHA). FEHA, like Title VII, provides protection against discrimination for applicants and employees on the basis of sex (as well as other protected categories). However, FEHA expressly provides protection against sexual harassment to persons "performing services pursuant to contract." This would generally protect independent contractors against harassment based on a protected category, though an independent contractor is not necessarily protected under FEHA against discrimination.
Whether an individual is an employee or an independent contractor can effect several different employment related laws, including workers' compensation, overtime and rest periods and unemployment insurance. The tests used to discern whether persons are independent contractors for purposes of these laws vary somewhat, but are generally similar to the test and factors considered by the court here.
Employers should take the time to evaluate those individuals it believes are independent contractors. You should consider the extent to which the employer can control the manner in which the individual performs the work, provides tools and equipment, requires a set work schedule, or has the individual performing the same work performed by employees. Resolving these issues now, rather than when litigation arises, can help to protect employers from liability or substantial damages.
Frances Rogers is an attorney with the labor and employment law firm of Liebert Cassidy Whitmore, in their Fresno office.
Reprinted and/or posted with the permission of Daily Journal Corp. (2010).