What Is The Difference Between An Independent Contractor & Employee?

What Are Independent Contractors? 

Independent contractors are responsible for their own work.  An independent contractor is a person who has decided to independently work for himself or herself. An independent contractor is responsible to pay his own self-employment and payroll taxes, and deal with risks and liabilities attached to his work himself. Independent contractors pay their own work expenses, tools, and materials to perform a service. The independent contractor also self advertises his services to anyone that might want them. Independent contractors have a right to control what is provided in the contract and what the contract entails. They are engaged in their own independently established business, and have control over the time, place, and location to where they work. As a result, the hiring party does not incur any liability for the wrongdoing of an independent contractor; whereas, an employer would incur liability for the actions of its employees.  

What Is An Employee?

An employee works under the control and supervision of an employer.  An employee is a worker that has duties and obligations to employers. An employer can be held responsible for the acts of its employees. Therefore, if an employee commits any type of wrongdoing within the scope of the employment, then the employer can be held liable in a civil court.  Moreover, employees must be paid at least minimum wage, must be provided certain insurances, and must be provided a safe workplace. The employer must withhold income tax, Social Security, and Medicare from the wages paid to the employee; whereas an independent contractor is responsible for paying his or her own income taxes and self-employment taxes.  An employee may also receive additional benefits given by the employer, such as health insurance. Employees are also protected by labor laws that provide mandates on certain working conditions and wage and hour requirements. Employees are also protected by the Fair Employment and Housing Act (FEHA) from discrimination in the hiring, demotion, and termination process. 

Why Is The Difference Between Employees And Independent Contractors Important? 

The legal difference between an independent contractor and an employee is important due to tax consequences and liability purposes.  Employers must follow the Internal Revenue Service’s (IRS) definitions of employees and independent contractors when choosing which IRS tax form to prepare. California courts have various standards for independent contractors. Whereas, the federal IRS uses a common law test to see if someone is an employee or independent contractor. This test looks over all evidence of how much control or independence is given in the work relationship with the employer. The way a worker is paid could also determine whether they are an independent contractor or an employee. The way the parties view themselves when signing a contract, and if the contract specifically states that it is for employment may determine the classification of the worker. Another factor that separates employees from independent contractors is if the worker’s services provided are essential to the business of the employer. If the worker is considered an employee, then the employer must withhold income tax, Social Security, and Medicare from the wages paid to the employee. For an independent contractor, the hiring company does not withhold taxes.  Moreover, a worker with an independent contractor status will cut off liability from the hiring company; whereas, an employer can be held vicariously liable for the acts of its employee within the scope of employment under the legal theory of \”respondeat superior\”.     

What Is Misclassification Of Workers?

Misclassification is the unlawful practice by employers which hurts the state of California through the loss of tax income.  Moreover, misclassification of workers puts financial responsibilities on the public. The misclassified workers will face unregulated and unsafe working conditions. In addition, the businesses may wrongfully misclassify workers so as to not comply with the California minimum wage requirements and overtime pay. 

What Are The Consequences Of Misclassifying Workers? 

If an employer is liable for misclassifying workers, the employer will be subjected to statutory penalties and civil penalties.  The misclassified worker can recover damages. The Labor Commissioner may also bring an action to recover damages. In addition, an employee of the company is permitted to bring a lawsuit through the Private Attorney General Act (PAGA) on behalf of the public.

In California, the deadline to file a lawsuit for unpaid wages is three years.  This time limit is known as the statute of limitations. In some cases the statute of limitations may be four years if the claim is for violations of the California Business and Professions Code section 17200, et seq., for Unfair Business Practices. 

Furthermore, the owner or manager of the business may also be held personally liable by the aggrieved worker.  This means that not only will the business assets be exposed to any liability but also the individual owner’s personal assets.  This gives the business owner significant exposure for any money that will be owed to satisfy the judgment.  

For instance, the liable employer will be responsible for wage and hour violations due to the misclassification. The employer will be liable for all unpaid overtime compensation, meal and break period pay. Also important is that the employer may incur exposure for tort liability for any injuries suffered by a worker when workers compensation insurance was not provided.  Workers compensation insurance must be provided to employees. But the employer may have misclassified its workers to avoid paying for this insurance. See California Labor Code section 3706.  

Moreover, pursuant to California Labor Code section 226.8, if the California Labor and Workforce Development Agency (LWDA) or the court determines that the employer acted willfully in misclassifying the worker, the employer will be subjected to substantial penalties.  The employer will be subjected to a civil penalty ranging from $5,000 to $15,000 for each misclassification. In addition, the employer may be subjected to a civil penalty ranging from $10,000 to $25,000 for each violation. 

The penalties can add up significantly and be very destructive to a business.  Furthermore, if an employer is found to have willfully misclassified an employee, the employer may be ordered to post on their website or other location a public notice signed by the employer and prominently displayed for one year.  The notice must state that (1) the employer has committed a serious violation of the law by engaging in the willful misclassification of employees, (2) the employer has changed its business practices in order to avoid committing further violations, (3) any employee who believes that he or she has been misclassified as an independent contractor may contact the LWDA, and (4) the notice is being posted pursuant to state order.  This posting has a substantial effect on the business goodwill and reputation. 

The employer may even be subjected to criminal liability pursuant to California Labor Code section 3700.5.  Also pursuant to federal law: “Any person who mis-classifies an employee as an independent contractor for the purpose of willfully attempting to evade or defeat any tax under the Internal Revenue Code may be found guilty of a felony, fined up to $100,000 and sentenced up to five years in prison.” See Title 26 of the United States Code section 7201.

What Is California’s “ABC Test”?

As of January 1, 2020, pursuant to California Assembly Bill No. 5, the California state courts are applying an “ABC Test” to determine if a worker is an employee or independent contractor in misclassification cases.  For workers who have been misclassified by their employer as independent contracts but should have been treated as W2 employees, California law permits these individuals to file a wage and hour lawsuit. The damages against the employer that they can recover include: 

  • Unpaid wages;
  • Unpaid overtime;
  • Unpaid meal and rest breaks; and
  • Penalties and interest.  

This decision from the California Courts came as a result of the case entitled Dynamex Operations West, Inc. vs. Superior Court of Los Angeles County.  This court decision created a standard that workers are to be considered “employees” unless the employer could prove that the workers qualified to be independent contractors. The burden of proof is on the alleged employer to prove that the worker is an independent contractor.  

The “ABC Test” is used to determine if workers are to be considered employees or independent contractors for purposes of the California Labor Code, the California Unemployment Insurance Code, and the California Industrial Welfare Commission (IWC) wage orders. Employers can evaluate the working relationships under this test to ensure that their workers are correctly classified.  Alternatively, the workers can file a claim if they think they have been misclassified. The ABC Test determines whether a worker is an independent contractor only if the following elements are established by the hiring party: 

  • The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
  • The worker performs work that is outside the usual course of the hiring entity’s business; and
  • The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

If the employer does not prove all of the “ABCs” the worker is deemed an employee. 

What Is The Borello Test? 

In certain cases, the ABC Test will be preempted by an applicable federal law and the Borello Test will be applied.  This test is derived from the decision S.G. Borello & Sons, Inc. vs. Dept. of Industrial Relations. The ABC Test may also not apply to certain exempted occupations and contracting relationships. 

Whenever the ABC Test does not apply, the Borello Test may be used to determine whether a worker is an employee. The Borello Test is a multifactor test which considers all relevant facts.  Not one factor is considered determinative. Rather, all facts are taken as a whole. The factors for the Borello Test include: 

  • If the worker has separate business from the employer.
  • How important the worker’s services are to the business.
  • Whether the employer supplies the tools and materials.
  • If the worker has to pay for tools and materials to do the job.
  • If the service needs a special skill in order to be done.
  • Whether the job requires an employer or supervisor to watch the worker. 
  • If the worker can lose money. 
  • If the job takes a shorter or longer time to complete.
  • How long the worker works for the employer. 
  • If the worker hires his own employees to complete the job.
  • If the employer can fire someone at any time or if there has to be a breach of contract.
  • The status of the employer employee relationship.


Want to know more about independent contractors and employees? Contact a business attorney at The Sterling Firm. We have an attorney experienced in providing counsel to businesses. We can help! Call now to speak with an attorney!

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