Hiring Employees or Independent Contractors
Short Answer:
It depends on which state you worker works in. California: Up until May of 2018, the primary difference between employees and independent contractors involved the level of “control” exercised by the company. However, this topic is complicated and made more unpredictable by the Dynamex case, AB-5, and the myriad exceptions to AB-5, which overhauled California’s existing worker classification scheme.
Everywhere else: The primary difference between an employee and an independent contractor is the level of control and support provided by the hiring entity.
California
In order for a worker to be an independent contractor, the burden is now on the employer to prove that all 3 of the following apply:
The worker is free from control and direction of the hiring entity in connection with the performance of the work, both under the contract for performance of the work and in fact;
The worker performs work that is outside the course of the hiring entity’s business; and
The worker is customarily engaged in an independently established trade, occupation, or business.
There are dozens of exceptions written into the above ABC-test, a handful of courts that have stayed it as to some workers, a handful of cases filed challenging the legality, and new legislation just passed to accept ride-share and delivery workers! I’m afraid, folks, that this one is not only a moving target but it’s absolutely going to require legal advice specific to your situation. If I wrote a section just on the AB-5 exceptions, it would take up half of this guide.
Every Other State
As of now, the following are still the primary factors relevant to the determination of independent contractors vs. employees federally and in other states
Instruction: Workers who are required to comply with others’ instructions about when, where, and how they are to work are usually employees.
Training: Training workers indicates that employers exercise control over the means by which results are accomplished.
Integration: When the success or continuation of a business depends on the performance of certain services, the workers performing those services are subject to a certain amount of control by the owners of the businesses.
Services rendered personally: If services must be rendered personally, employers control both the means and the results of the work.
Hiring, supervising, and paying assistants: Control is exercised if employers hire, supervise, and pay assistants to their workers.
Continuing relationships: Continuing relationships between workers and employers, as opposed to hiring a worker for a discrete project with a termination date, indicate that employer- employee relationships exist.
Set hours of work: The establishment of set hours of work by employers indicates control.
Full-time required: If workers must devote full time to employers’ businesses, employers have control over workers’ time. Independent contractors are free to work when and for whom they choose.
Doing work on employers’ premises: Control is indicated if the work is performed on employers’ premises.
Order or sequences set: Control is indicated if workers are not free to choose their own patterns of work but must perform services in the sequences set by the employers.
Oral or written reports: Control is indicated if workers must submit regular oral or written reports to employers.
Payment by hour, week, or month: This points to employer-employee relationships, provided that this method of payment is not just a convenient way of paying a lump sum agreed on as the cost of a job. Independent contractors are usually paid by the job or on straight commission.
Payment of business and/or traveling expenses: Employers paying workers’ expenses of this nature shows that employer-employee relationships usually exist.
Furnishing tools and materials: If employers furnish significant tools, materials, and other equipment, employer-employee relationships usually exist.
Significant investments: Workers are independent contractors if they invest in facilities that are not typically maintained by employees (such as an office rented at fair market value from an unrelated party). Employees depend on employers for such facilities.
Realization of profits or losses: Workers who can realize profits or losses (in addition to profits or losses ordinarily realized by employees) are independent contractors. Workers who cannot are generally employees.
Working for more than one firm at a time: If workers perform services for a number of unrelated persons at the same time, they are usually independent contractors.
Making services available to the general public: Workers are usually independent contractors if they make their services available to the general public on a regular and consistent basis.
Right to discharge: The right of employers to discharge workers indicates that the workers are employees.
Right to terminate: Workers are employees if they have the right to end their relationships with their principals at any time without incurring liability.
Courts have also considered whether the services being provided are an integral part of the company’s business or whether the services are separate, distinct and/or usually performed by independent professionals.
Hiring Guidelines
It’s critical that you follow federal and local law with regard to proper hiring procedures. A failure to adhere to employment law can be devastating to your business, both legally and public relations-wise.
Below is an overview of critical guidelines.
Questions not to Ask in an Interview:
Questions relating to race, national origin, gender, medical condition religion, sexual orientation and gender identification, military or veteran status. These are all protected classes in California, and many are also federally protected.
Additionally, the following subject areas are often used as a run-around for many of the above direct questions and should also be avoided.
Birthplace
Marital Status
Citizenship
Date of graduation from high school or grade school
English language skills, unless necessary for the job
Religious affiliation
How/when foreign language skills were acquired
Relatives’ names
Mental illness history
Membership in organizations
Maiden name
Pregnancy status
Number of children, future plans to have children
Hospitalization, illness history, prescription medications
Days absent from work in previous year due to illness
Workers comp history
Past treatment for drugs and alcohol
Weight or height, unless necessary to safely perform the job
Other topics to avoid:
Credit Rating or BK proceedings
Past garnishment of wages
Whether they own a home
With whom they reside
Whether they’ve ever sued a past employer
Whether they smoke
Arrest record (you cannot ask about arrests or detentions that did not result in conviction). You can ask about any arrest for which the applicant is currently out on bail.
Whether military discharge was honorable or dishonorable
Foreign military service
Questions focusing on paid work to the exclusion of volunteer work
Questions to ask in an Interview:
Job history; reasons for leaving previous jobs
Place of residence
Proof of age (whether the applicant can submit proof if hired)
Whether the applicant is 18 years of age or older
Whether a minor applicant can provide a work permit after being hired
Education level, if job-related
Schools attended
Any name change about which the employer should know in order to verify the applicant’s job history
Whether the applicant is authorized to work in the country
Whether the applicant has relevant paid, unpaid or volunteer work experience
Name and address of a person to be notified in case of emergency
Whether the applicant can perform the specific job functions with or without accommodations (it may be helpful to attach a job description to the application form)
Whether the applicant can meet attendance requirements (you should list regular working hours and leave policies such as working overtime, working on weekends, traveling for work, etc.)
Felony convictions record (the EEOC recommends that questions about convictions be accompanied by a statement that a conviction record will not necessarily bar employment, and that factors such as age at the time of the offense, nature of the violation and rehabilitation will be taken in account). If you decide not to hire based on a conviction, it must be for a legitimate business reason. (Note: In San Francisco, CA, companies with 20 or more employees cannot ask about or run background checks involving felony convictions until a conditional offer has been made).
Steps to Take for a Successful Hiring Process
Obtain an authorization to check the applicant’s references. Your communication with them is generally protected (unless statements are made with malice). Obviously, do not ask them any of the above questions. Also, dig in and make sure they are actual work references rather than friends or family members.
Review any available social media accounts.
Have applicants sign a statement that all answers the applicant provides are true and complete. (You may be able to defend against a wrongful termination lawsuit by proving that the employee put false information on the job application, even if you discover this after the fact.)
Have applicants sign a statement that employment is “at will,” which means both you and the employee can end the employment relationship at any time, with or without cause.
Conduct background checks by an outside investigative company. Avoid doing credit checks as a part of it because those often contain criminal histories. Under the California Investigative Consumer Reporting Agencies Act (ICRAA), an employer is permitted to use consumer credit reports only if the individual is applying for or works in the following positions: a managerial position; a position where the individual would be a named signatory on the employer’s bank or credit card account and/or authorized to transfer money on behalf of the employer; a position with access to large amounts of cash, or a position that affords access to confidential or proprietary information. [Labor Code 1024.5]. If you’re not running a credit report, it’s best to communicate that to the applicant.
You can require a physical exam, but only after the offer is made. It cannot be aimed at discovering physical impairments. It must be paid for by you and provided to the new hire.
After a conditional offer of employment (and after the background check is passed), you may require a drug test, provided that you require the drug test for all new hires.
The Dos & Don’ts of Firing Guidelines
Dos:
Have written, established policies for discipline and reviews and follow them consistently with everyone. Handbooks are great in this regard, as are forms that are used consistently. (Forms for writing-up an employee, forms for documenting sick day requests, etc.)
Have written job expectations and metrics.
Document excessive tardiness, absences, insubordination, failure to perform job duties, and any other issue with an employee. Progressive discipline is a great defense, if used consistently (it can be the opposite if used inconsistently).
If an employee is being fired for an incident or series of incidents, do conduct and document a thorough investigation. It’s advisable to have the investigation lead by counsel to ensure attorney client privilege. (Sometimes, if not conducted by attorneys, the investigations – which are discoverable – actually form the basis of the lawsuit.)
Ask consistent questions of every witness.
Have questions prepared in advance.
Remain objective.
Treat each incidence separately.
Do not unnecessarily disclose information to witnesses.
Do not promise confidentiality to witnesses.
Make efforts to keep information confidential.
Conduct drug tests if you have a reasonable suspicion that an employee is under the influence of drugs or alcohol at work. (There is a privacy concern here. It’s best to conduct the test with privacy, though precautions can be taken to ensure that they aren’t being faked – the tester can listen to them pee but not watch them, for example.)
Keep the termination conversation brief. (This isn’t legally inspired as much as experts consider it best practices. But there is debate, so do not consider this the final word. Generally, the feeling is that the more detail you give, the more an employee has to argue against, including an alleged failure to follow your own established procedures. It’s awkward, but it’s best not to risk them walking out and straight into a lawyer’s office because they disagreed with something you said. Give them little to disagree with. If you do disclose the reasons, be brief and stick only to documented facts.
Thoroughly investigate any claims of a hostile work environment, discrimination, etc. to prevent allegations of constructive termination. There are many factors that can lead to a constructive termination claim (demotion, humiliation, embarrassment, badgering, harassment, etc.).
Have an HR witness present for the termination.
Don’ts:
Whistleblower: do not fire anyone who has recently reported a violation of law. Reach out to counsel in the event that this comes up – the law is nuanced and too complicated for this document (re who they report to, what they report, what type of violation is alleged, the accuracy of the reported violation, etc.)
Discrimination. You can’t fire anyone for any of the reasons for which denying employment is illegal.
Worker’s comp. You cannot fire someone because they apply for worker’s compensation.
Medical leave. You cannot fire someone because they utilized the Family Medical leave act.
Investigation. You cannot fire someone for participating in any discrimination or sexual harassment investigation.
Don’t conduct random drug tests, unless they are for safety-sensitive positions.
Don’t fire anyone with a medical marijuana card (though you can refuse to hire anyone who tests positive, regardless of possessing a card).
General Employment Guidance
Employment law is governed by the state in which the employee works. It varies wildly from state to state. For instance, in California, non-competes are not only unenforceable, but courts are sanctioning companies that attempt to use them. Many states allow non-compete agreements. Further, each state has different requirements with regard to required benefits, required workplace postings, wage and hour regulations, and more.
I recommend using the following professionals to ensure compliance (in addition to an attorney): (1) an insurance broker to secure worker’s compensation insurance and any other advisable insurance for your industry and (2) a payroll service that insures and indemnifies for wage and hour claims.
The key to employment law (once you’ve established compliance with the above requirements) is to treat everyone the same and do not punish anyone who brings issues to your attention.
Discrimination claims rely on assertions that a particular person was treated differently. While this may sound easy, young (and old) businesses often overlook the importance of having written guidelines, handbooks, and policies to direct them in various situations. Often these policies, when consistently followed, establish that a given employee was treated the same as all similarly situated employees. Retaliation claims are based on allegations that a worker complained about a violation of law or policy and was punished for it in some way or another. Sexual Harassment claims rest on unwanted sexual advances or behavior that are severe and/or pervasive.
These are the three most common claims brought by a terminated employee. You can’t eliminate the possibility that an employee will bring a frivolous claim, but you can take steps to minimize your exposure.
