As mentioned in an earlier blog post employment litigation is a fast growing area of practice in the State of California. Plaintiff’s lawyers are highly motivated to find even a nominal amount of unpaid wages because they know that they stand to recover all of their attorneys’ fees if employers fight their claims. Not surprisingly, these attorneys’ fees requests can sometimes be somewhat inflated.
While many business owners see the short term cost savings to be had by incorrectly paying workers as independent contractors, they fail to take into account the inevitable litigation costs related to lawsuits from workers, which greatly outweigh any savings they may have realized. Back wages, penalties, interest and attorneys’ fees and costs can snowball quickly into tens or even hundreds of thousands of dollars.
To properly classify workers, business owners need to take into account the various tests created by the Internal Revenue Service, the California Employment Development Department, and California state and federal courts. Previously, I outlined the IRS 20 Factor Test. Below, I outline the IRS Control Test.
The “IRS Control Test” is a newer IRS test used to analyze three main factors for identifying a contracting party-independent contractor relationship: (1) the behavioral control; (2) financial control; and (3) the relationship of the parties. With respect to behavioral control, this factor points out that anyone who performs services for the commissioning party is an employee if the commissioning party has the right to control what will be done and how it will be done. With respect to financial control, this factor analyzes whether the commissioning party has any direct control over the business aspects of work. Since independent contractors are in business for themselves and are generally open and available to conduct business with any member of the general public, they should have financial control over their work. In essence, an independent contractor can realize a profit or incur a loss through work performed as an independent contractor. Lastly, the relationship factor analyzes how the commissioning party and the worker perceive the relationship. A permanent relationship and employment benefits generally indicate an employer-employee relationship although the substance of the relationship determines the employment status.