What Is An Independent Contractor? Part II
By Johnny Duncan
California’s Workers’ Compensation Laws
In California, employers must carry workers’ compensation insurance for all employees or provide self-insurance. The employee need not prove employer was at fault or negligent to recover benefits, but a covered employee cannot sue the employer for tort damages in court. On the other hand, independent contractors are not entitled to recover workers’ compensation benefits, but they may sue the employer in tort for harm caused by the employer. To avoid this, the employer has the option to make an IC a "special employee" for the sole purpose of workers’ compensation coverage. This can be accomplished by the employer naming the individual a special employee in the agreement "for the purpose of workers’ compensation coverage only." This procedure may provide the employer with some protection from exposure to tort suits. The drawback is that the employer runs the risk of "sitting on the fence" of whether the individual is an IC or employee and is subject to the scrutiny of other employment statutes.
If an IC has his or her own employees, and the employer agrees to maintain a complete IC relationship, employers frequently require that the IC obtain his or her own workers’ compensation coverage for those employees.
The "Peculiar Risk" Doctrine
Another interesting ruling to come from California is the "peculiar risk" doctrine. The "peculiar risk" doctrine is an exception to the rule that a person who hires an IC is not liable to third parties for injury caused by the contractor’s negligence in performing the work. This exception pertains to contracted work that poses some inherent risk of injury to others. The courts have concluded that a property owner who undertook obviously dangerous work on his property should not escape liability for injuries to others simply by hiring an independent worker to perform the work. The peculiar risk doctrine was adopted to ensure that innocent third parties injured by the negligence of an IC hired by a property owner to perform obviously dangerous work, would not have to depend on the IC to receive compensation for the injuries.
The peculiar risk doctrine has been somewhat confusing in some courts. One particular case though, helped to clarify some of the confusion. In Privette v. Superior Court, 1993 WL 264465,93 CDOS 5492 (July 19,1993), the court held that when injuries from an IC’s performance of inherently dangerous work are to an employee of the contractor, and thus subject to workers’ compensation coverage, the doctrine of peculiar risk affords no basis for the employee to seek recovery in tort damages from the person who hired the contractor but did not cause the injuries. This case began when Franklin Privette hired Jim Krause Roofing, Inc. to install a tar and gravel roof on his home. One of the Krause foremen instructed Jesus Contreras, a Krause employee, to carry a bucket of 400 degree tar up an unstable ladder in violation of Cal/OSHA regulations. The employee initially refused, complaining about the unsafe conditions. He eventually complied and he fell from the ladder and was severely burned by the tar.
Jesus Contresas recovered workers’ compensation from Krause but also sued Privette on a peculiar risk theory. Several jurisdictions, including California, have recognized and permitted recovery under the peculiar risk doctrine. However, Privette argued that the peculiar risk doctrine:
The court agreed with the first two points and explained that the peculiar risk doctrine should not be applied to claims by an injured contractor’s employee because the reason for the doctrine is already served by the workers’ compensation laws. Taking into account the peculiar risk doctrine in light of the goals of the workers’ compensation statutes seek to achieve, the court concluded that extending the doctrine to the employees of ICs was unwarranted.
- Should not be applicable to injuries suffered by employees of ICs in addition to third party bystanders because employees are covered by workers’ compensation
- Should not be extended to apply to individual homeowners because, unlike business owners, they are not able to spread the risk of loss and are not financially able to insure for large losses
- Was not applicable because of the "collateral negligence" of the employer and the unforeseeability of the injury to Privette. Privette also argued that Jesus Contresas assumed the risk of any injuries and that the doctrine of peculiar risk was so confusing that it should be abandoned altogether.
Cases Where Status of Worker Classification is Questioned
In Yellow Cab Cooperative. Inc. v. Workers’ Compensation Appeals Board and Richard Edwinson, 226 Cal. App. 3d 1288 (1991), the cab drivers had to sign nonnegotiable lease agreements that stated they were independent contractors. The Court concluded that the cab companies made the drivers sign the agreements to avoid having to pay workers’ compensation and unemployment benefits to the drivers. Superior Court Judge William Cahill ruled that the drivers were indeed cab company employees and not ICs, as management had suggested. The ruling was found because of the degree of control the company exercised over the drivers. It was discovered through the companies’ policies that:
As stated earlier, employers will sometimes declare workers as ICs to avoid paying benefits, taxes, and other employee provisions required under the law. Frequently, workers are enticed into accepting the employer’s offer to become an IC because he or she will receive a higher rate of pay. Just because an employer declares a person an IC does not make it so. In the Yellow Cab case, the attempt to make employees ICs simply by signing an agreement backfired on the companies. By ruling that the drivers were employees, they became eligible for workers’ compensation, unemployment and many other benefits normally available only to employees.
- The drivers’ backgrounds are checked
- The companies require employment applications
- Driver’s relationship with Yellow Cab could be terminated for misconduct
- The driver was prohibited from driving for other companies
- The companies fix car rental fees and the security deposits drivers must pay
- They set the drivers’ hours
Roberts v. Gator Freightways, Inc. (included in Appendix B)
This is an interesting case with some unique features. Roland Roberts, the claimant is a truck driver and was driving a tractor leased to Gator Freightways by Lucious Reason, the owner and operator, and pulling a trailer owned by Gator that was loaded with freight being transported for Gator’s customer pursuant to Gator’s bill of lading. While unloading the trailer, Roberts fell, injuring himself on the pavement. The basis for the claim was to determine under whose workers’ compensation insurance would Roberts be covered. It was decided that Roberts should not be covered under Gator, but under Reason because of the right of control Reason had over Roberts. The case becomes somewhat confusing in determining who is an IC and who is responsible for coverage of Roberts in respect to workers’ compensation. In the final analysis, it was determined that Lucious Reason acted as an IC to Gator Freightways with Roberts as an employee of Reason because Reason was responsible for: 1) hiring his own employees; 2) paying all workers’ compensation, taxes, and compensation for his employees; 3) establishing his employee’s schedules; 4) assigning routes for his employees; 5) providing vehicles for any drivers he employs; and 6) paying for maintenance and repairs of vehicles.
Rabon v. Inn of Lake City, Inc. (included in Appendix B)
Dawn Rabon was employed by Wells Fargo Guard Services, Inc. and was assigned to work as a security guard at a Holiday Inn. While making her "rounds" of the hotel around 2:30 AM, she slipped on a mayonnaise packet and fell while descending an outside stairwell sustaining injuries. She was paid workers’ compensation benefits by Wells Fargo’s insurance carrier. Shortly thereafter, she filed suit against the hotel, stating that she was a business invitee on the hotel’s premises and that the hotel had negligently failed to exercise its duty of reasonable care for the safety of invitees.
Judge Van Nortwick noted that the Inn had an "obligation to its patrons to provide a reasonably safe and secure environment ... and that the obligation was sublet to Wells Fargo." In other words, it is assumed that there exists a contract between the hotel and its patrons that a safe and secure environment will be provided and that the provision falls under the responsibility of the hotel. This is fascinating in that the hotel, even with a contract with an IC (Wells Fargo) to provide security, may be an employer to the IC’s employees. Other factors, such as the fact that the Wells Fargo security guards would sometimes help out the hotel’s desk clerks and deliver linen to the guests room, confuses the scope of the original job and makes it difficult to define if the worker is an employee of the hotel or not.
As confusing as this gets, the fine line between what differentiates an employee from an IC can be clarified with documented contracts defining what the worker is, what is his or her job description, and the boundaries of the scope of the work.
Cautions and Defenses for Employers
By now it is obvious that determining a worker’s status is important to the company. Besides the hassle of dealing with the IRS and other governmental agencies, the potential of employee or IC lawsuits is greater if the company’s employee defining techniques are fuzzy. Some things to be aware of as an employer are:
How widely leased employees are used. If a company has too many temporary workers relative to full-time employees, the IRS can take away the company’s tax-qualified benefit plan.
Leased workers are included in the calculation when the IRS determines that a company’s plan is discriminatory
In non-traditional working relationships, determine what degree of control the employer has over the worker
Finally, determine whether the worker is truly an IC, an employer of a third party, or an employee of the company
When hiring ICs, the best line of defense from governmental agency audits, lawsuits, and disruption of business is to document every aspect of the employment relationship. Courts tend to look closely at an employment agreement. Also, the claim of an IC relationship is strengthened if the parties take the time to reduce their agreement to writing. Language to include in the agreement should at least state that the worker:
This agreement should also include a provision that specifies methods, rights and consequences of termination by either party as well as a cut-off date if the nature of the relationship demands that the agreement be open-ended instead of project-based. Of course, the contract will only serve as a defense if both parties follow it. If an employer designs an agreement, it must have trained staff who will follow and enforce its outline.
- Is in no way an employee (it helps to get this out front right away)
- Has the right to control the accomplishment of the project
- Is not paid by the time, but by the project
- Supplies all tools and equipment for the project
- Pays out-of-pocket expenses and taxes (phone, computer, travel, etc. expenses and government required taxes)
- Provides his or her workers’ compensation insurance
- Is exempt from employee benefits
Since businesses are daily experiencing change in competition, demand, and regulations, it greatly benefits organizations to become more flexible. By using non-traditional workers, a company can move with the ebb and flow that business dictates. Enhanced productivity, reduced costs, labor stability, and creative opportunities are just a few of the added benefits of using independent contractors. Independent contracting is not just limited to the professions such as lawyers, doctors, and accountants, but to almost any job -- from construction to nursing to human resource personnel. The Bureau of Labor Statistics estimates that there are over eight million ICs in the United States and that number is growing daily.
Even with the possible complications associated with hiring ICs, the benefit to the firm in flexibility and creativity far outweighs them. The exposure to penalties and fines are eliminated when the correct classification of the worker is determined and documented. The guidelines and important factors presented is a consideration for any business to begin with. Knowing where to go for classification information and studying the requirements of governmental agencies will prevent future headaches and help to maintain a harmonious working environment.