Employment Law Alert: Control Over Employee’s Working Conditions Defeats Employer’s Claim that Employee is Independent Contractor

On August 28, 2013, the Sixth District Court of Appeal, in Bain v. Tax Reducers Inc., No. H037452, held a Plaintiff tax preparer was an employee, and not an independent contractor, of defendant Tax Reducers, Inc.

In December 2004, TRI, a provider of tax preparation and bookkeeping services, purchased Conard and Associates, a tax preparation firm for which Plaintiff Bain worked. Conard classified Bain as an an independent contractor. Conard did not withhold taxes, issued Bain IRS 1099 forms, and listed Bain as a “consultant” on a profit and loss statement provided to TRI. Following a mid-2004 seminar on tax implications of employees and independent contractors, Plaintiff and Conard agreed Plaintiff should be classified as an employee and planned to formalize the change in 2005. About a month after TRI’s January 2005 takeover of Conard, Plaintiff asked TRI’s CEO when he would be paid. Conard responded by leaving an independent contractor agreement on Plaintiff’s desk. Plaintiff rejected the agreement, which included a pay decrease, and ultimately resigned mid-February 2005.

The next month, Plaintiff filed a claim against TRI with the Labor Commissioner for Labor Code violations associated with failure to pay wages. The Labor Comissioner awarded Bain $15,000 in wages, interest, and penalties. Although the parties reached a settlement, Plaintiff subsequently filed a lawsuit against TRI seeking to enforce the settlement and restating the Labor Code violations. Plaintiff prevailed against TRI at trial and was awarded $25,000 in unpaid wages, waiting time penalties, liquidated damages, and interest, plus attorney fees and costs. TRI appealed and argued the court had applied an improper presumption that Plaintiff was an employee, and that Plaintiff was not entitled to penalties under Labor Code section 203 due to a good faith dispute regarding his classification.

The court of appeal affirmed in part and reversed in part, holding that Bain’s statutory wage claims under Labor Code sections 202, 203, and 1194 were timely.

The Court of Appeal rejected TRI’s contentions and relied upon Labor Code section 3357 (on workers’ compensation) and Robinson v. George (1940) 16 Cal.2d 238 (on vicarious liability), which provide a presumption that one performing work for another is an employee. In reaching its decision, the Court applied several factors set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, which include the extent of a principal’s control over the means and provision of the instrumentalities of work; the method of payment; whether the work is the principal’s regular business; the worker’s employment of helpers; and the parties’ understanding of the relationship. The Court reasoned TRI required Plaintiff to attend staff meetings, record his hours on the same time sheets as TRI employees, and perform the same administrative duties as other TRI employees. The Court observed that Plaintiff prepared taxes for TRI, which was an integral part of TRI’s business. Moreover, TRI supplied most of Plaintiff’s equipment; reimbursed Plaintiff for client-related expenses, determined the projects on which Plaintiff would work, and determined the hours Plaintiff worked. The Court further noted Plaintiff did not have any outside clients and TRI marketed Plaintiff to its clients as an employee.

The Court concluded substantial evidence supported the trial court’s ruling that Plaintiff was an employee, and, therefore, entitled to pursue Labor Code violations. Because the facts did not give rise to a good faith dispute on whether Plaintiff was an independent contractor, TRI was subject to waiting time penalties under Labor Code section 203 for willful failure to pay wages of a discharged employee.

The Bain decision emphasizes that employers should be vigilant about reviewing the totality of facts and circumstances when classifying workers. Labels and tax treatment are not dispositive.

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September 9, 2013