Call an Employee a Contractor and You Might Be Wearing a Scarlet Letter!

By Philip E. Goss, Jr., Esq.

I have a question for you: What do you call a person you have brought into your business to provide a service that relates to your core product (teaching martial arts)? The answer might seem obvious — clearly, that person is an employee.

Issues arise when businesses choose to turn a blind eye and categorize an employee as an independent contractor. This must end now! New laws require that you err on the side of caution in how you classify your personnel.

A Seismic Shift in the Law

As is frequently the case, California is a trendsetter with respect to this employment law. I won’t bore you with legal details, but the short of the matter is that California, along with a growing number of other states, now uses a greatly truncated test to determine whether an individual is an independent contractor or an employee. There are three determining criteria: First, do you control the worker or direct that person’s activities? Second, does the individual provide services to other businesses or exclusively to you?

The third factor is the game-changer. If the purported “independent contractor” provides a service that is similar or consistent with your core business purpose, then that individual is legally considered your employee. When examining employee-vs.-contractor status, emphasis has shifted from how the services are being provided to what services are being provided.

Rarely will you have someone engaged in your business process who is not integral to your mission of providing martial arts training.

The second major trending change is that now there is a legal presumption that every employment situation is an employer-employee relationship, rather than an independent contractor-business relationship.

This means that it is assumed that, rather than standing on equal footing (as a contractor would be to a business), you are responsible for or above the people working within your business. Trying to prove otherwise will often be a fool’s errand. It’s rare that legal presumptions are successfully rebutted in the world of employment law.

Monetary Penalties for Misclassification

The penalties for intentional misclassification of employee status have always been severe. Now, in many jurisdictions, the severity is multiplied for misclassification and for each additional violation.

In other words, you will incur one penalty for the fact that you incorrectly characterized an employee or employees, as well as additional penalties for each individual mischaracterization.

One simple incorrect decision can start the process rolling. Tens of thousands of dollars in penalties can be assessed.

The New Trend: Non-Monetary Penalties

The parade of horribleness keeps on coming. In California, the new laws allow the imposition of personal financial liability (yes, the dreaded piercing of the corporate veil) against the owner or anyone operating on behalf of the owner, including managers, corporate officers and directors. This is a dramatic shift in the law. Very infrequently do situations allow for personal liability in the corporate context. A strong set of claims can bankrupt not only your school but also the people owning and/or managing it.

The Scarlet Letter

California has enacted, and other jurisdictions are considering, laws that penalize intentional misclassification by making your company wear a scarlet letter. The offending business will be required to post on its website (or in a public location if it does not operate a website) a notice admitting to a serious violation of the law.

This notice will also state that the business has enacted remedial measures to prevent future violations and that any other service provider who believes he or she is the victim of incorrect job classification can contact an enumerated state agency for additional relief (and more heartache for your school). Lest anyone assume that the notice is a voluntary mea culpa, it must also explain that it was posted to comply with state law.

Such a notice will adversely impact your business, as well as the goodwill and reputation you have worked to create. It will be difficult to promote the positive aspects of your school when shameful physical evidence of past business indiscretions hangs on your front door.

One important note: I realize I have focused on the new laws in California. This state is a far distance (both in mileage and general attitude) from middle America. However, movements started on the West Coast have, in the past, found their way across the country. Sooner or later, these laws will reach your school. Be ready for the day!

Attorney Phil, Jr. welcomes any email comments or questions at [email protected] and will attempt to respond personally, time permitting.