This blog post was written for CALSSA by Joel Van Parys of CDF Labor Law
It is tempting for companies to contract with workers for aspects of their business. If lawful working with contractors generally saves money. But California law strongly prefers that workers be classified as employees and makes it very difficult to legally have contractors for significant parts of a company’s business. There are some situations where contractors make sense and others that create substantial risk.
To properly be considered a contractor a worker must satisfy each of the following factors: (A) the worker is free from the control and direction of the contracting entity with the performance of the work, both by the terms of the contact and in reality; (B) the worker performs work that is outside the usual course of the hiring company’s business; and (C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
In short, this means that the company cannot control the way the contractor does his work. That must be written in the contract and be true in practice. For example, if you contract with an IT professional to run your company’s computer network you cannot tell that person that they have to work 9:00 – 5:00. The second part of the test is the hardest to satisfy. That part means that the contractor cannot perform work that is a usual part of the company’s business. For instance, if a solar installer contracts with workers to install panels it is almost certain that those workers are misclassified. However, information technology is probably not the company’s business so contracting with an IT professional probably passes this part of the test. The last part of the test means that the contractor must have an independent established business that regularly does the same type of work they are performing for your company.
Many solar companies consider working with contractors for various aspects of their business. As discussed above, it is very likely that solar installation companies cannot lawfully contract with workers to install solar panels. But there are other aspects of the business that may be good situations for contractors. For instance, some solar companies may be able to contract with workers to sell their products. Whether this is legal depends on the facts of that situation – is there a contractor agreement; what does it say; does the Company conduct any sales activities itself; how does the Company work with sales staff; do the sales people have their own companies. These are just several factors that could determine whether that sales person can properly be classified as a contractor.
If a company is considering contracting with workers for any positions closely related to the way it does business, installation or sales work for instance, we strongly recommend working with your attorney to ensure that the job can properly be classified as a contractor and, assuming it can, to properly set up the contractor agreement and help form best practices for dealing with the contractor. Taking these steps will help companies avoid the substantial monetary risk that comes from misclassification, including unpaid overtime, payments for missed meal and rest breaks, unpaid reimbursements, and penalties.