California employers who use independent contractors are increasingly subject to the risk of liability based on a claim that the worker legally should be considered an employee and not an independent contractor. This is often called a “misclassification claim” –that is, the worker claims that he or she should have been classified and treated as an employee, with all the rights that employees may enjoy. These rights include but are not limited to the right to be paid minimum wage, the right to overtime, and the right to compliant meal and rest periods.  If an employer loses a misclassification case, the liability is often substantial due to a very expensive penalty scheme under California law.  An employer may also suffer from fines and penalties for failure to provide workers compensation, fund payroll taxes, etc.

In California, a worker bringing a wage and hour claim is entitled to the presumption that he or she is an employee. The employer therefore has the burden of proving that the worker rendered services as an independent contractor. Employers have long relied on the common law “right to control test” from California’s seminal case regarding classification of a worker, S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341. The recent California case Linton v. DeSoto Cab Company, Inc., decided on October 5, 2017, addressed a key issue in the application of the right to control test.

In Linton, the plaintiff worked as a cab driver for the defendant cab company. Upon hire, plaintiff signed a 15-page “Taxicab Lease Agreement” containing language disclaiming any employment relationship between the parties. During his employment, plaintiff exercised a significant amount of freedom. For example, he could choose what customers to pick up, did not have to check in with the company during his shift, or when taking breaks, and kept all fares and tips earned during the shift.

Plaintiff was terminated for allegedly obtaining a passenger’s credit card information and making repeated charges on her account. Plaintiff was not given a chance to rebut the charges and was terminated due to an “at will” termination clause in the Lease Agreement. He then brought a wage and hour action against DeSoto Cab Company claiming misclassification.

The Court explained that the labels used by the parties are not dispositive and the degree of freedom permitted to a worker does not automatically lead to the conclusion that the worker is an independent contractor. The key issue is the control retained by the employer. Despite the employment disclaimer in the Lease Agreement and the fact that the plaintiff had a significant amount of control over his job, the Court concluded that there was “strong evidence of an employment relationship” and remanded the case back to the trial court for a new trial.

Takeaway for Employers:

• In California, a worker is presumed to be an employee until the Employer can prove otherwise.
• Under the right to control test the key issue is how much control the employer retains over the relationship, not the degree of freedom given to the worker.
• When analyzing the classification of a worker, the Court will focus on the actions of the parties during the relationship, not the labels used.
• Employers should be cautious about including contract provisions that provide the ability to terminate independent contractor agreements at any time without cause.

Employers should review independent contractor agreements in light of this new case.  If the right to terminate the worker without cause is important the employer, the employer should consider classifying the worker as an employee.  Employers making widespread use of many independent contractors should keep in mind that the loss of a misclassification case, possibly brought as a class action case, can be extremely costly.

New California Legislation and cases, including the above mentioned laws, will be discussed during our “New Year Employment Law Update for California Employers” Webinar on Thursday, December 7, 2017. For more information and registration, visit: https://suttonhague.com/events.