The Employment Development Department of California publishes a worksheet to determine if a person you are hiring is an employee or a contractor. This topic seems to come up a lot and it is very frustrating for me. I try to follow the laws and it is more expensive to pay taxes and buy workers comp than to pay workers as independent contractors and 1099 them. This makes my operating costs much higher than my competitors and it is hard to charge higher rates because the residential customers just don't seem to care if a business is operating legally or not. I think that the law is clear that in most cases cleaning workers cannot be treated as independent contractors.
http://www.edd.ca.gov/taxrep/de38.pdf
WORKSHEET ON EMPLOYMENT STATUS
Questions 1 – 3 are significant questions. If the answer to any of them is "Yes," it is a strong indication that the worker is an employee, and you have a high probability of risk if you classify
the worker as an independent contractor.
1. Do you instruct or supervise the person while he or she
is working?
Independent contractors are free to do jobs in their own
way, using specific methods they choose. A person or
firm engages an independent contractor for the job#%92s end
result. When a worker is required to follow company
procedure manuals and/or is given specific instructions on
how to perform the work, the worker is normally an
employee.
Yes _____ No _____
2. Can the worker quit or be discharged (fired) at any
time?
If you have the right to fire the worker without notice, it
indicates that you have the right to control the worker.
Independent contractors are engaged to do specific jobs
and cannot be fired before the job is complete unless they
violate the terms of the contract. They are not free to quit
and walk away until the job is complete. For example, if a
shoe store owner hires an attorney to review his or her
lease, the attorney would get paid only after satisfactory
completion of the job.
Yes _____ No _____
3. Is the work being performed part of your regular
business?
Work which is a necessary part of the regular trade or
business is normally done by employees. For example, a
sales clerk is selling shoes in a shoe store. A shoe store
owner could not operate without sales clerks to sell shoes.
On the other hand, a plumber engaged to fix the pipes in
the bathroom of the store is performing a service on a onetime
or occasional basis that is not an essential part of the
purpose of the business enterprise. A certified public
accountant engaged to prepare tax returns and financial
statements for the business would also be an example of
an independent contractor.
Yes _____ No _____
A "No" answer to questions 4 – 6 indicates that the individual is not in a business for himself or herself and would therefore normally be an employee.
4. Does the worker have a separately established
business?
When individuals hold themselves out to the general public
as available to perform services similar to those performed
for you, it is evidence that the individuals are operating
separately established businesses and would normally be
independent contractors. Independent contractors are
free to hire employees and assign the work to others in
any way they choose. Independent contractors have the
authority to fire their employees without your knowledge or
consent. Independent contractors can normally advertise
their services in newspapers and/or publications, yellow
page listings, and/or seek new customers through the use
of business cards.
Yes _____ No _____
5. Is the worker free to make business decisions which
affect his or her ability to profit from the work?
An individual is normally an independent contractor when
he or she is free to make business decisions which impact
his or her ability to profit or suffer a loss. This involves real
economic risk, not just the risk of not getting paid. These
decisions would normally involve the acquisition, use,
and/or disposition of equipment, facilities, and stock in trade
which are under his or her control. Further examples of the
ability to make economic business decisions include the
amount and type of advertising for the business, the priority
in which assignments are worked, and selection of the
types and amounts of insurance coverage for the business.
Yes _____ No _____
6. Does the individual have a substantial investment which
would subject him or her to a financial risk of loss?
Independent contractors furnish the tools, equipment, and
supplies needed to perform the work. Independent
contractors normally have an investment in the items
needed to complete their tasks. To the extent necessary
for the specific type of business, independent contractors
provide their own business facility.
Yes _____ No _____
Questions 7 – 13 are additional factors that should be considered. A "Yes" answer to any of the questions is an indication the worker may be an employee, but no one factor by itself is
deciding. All factors must be considered and weighed together to determine which type of relationship exists. However, the greater the number of "Yes" answers to questions 7 – 13 the greater the likelihood the worker is performing services as an employee.
7. Do you have employees who do the same type of work?
If the work being done is basically the same as work that is
normally done by your employees, it indicates that the
worker is an employee. This applies even if the work is
being done on a one-time basis. For instance, to handle an
extra workload or replace an employee who is on vacation,
a worker is hired to fill in on a temporary basis. This worker
is a temporary employee, not an independent contractor.
(Note: If you contract with a temporary agency to provide
you with a worker, the worker is normally an employee but
may be an employee of the temporary agency. You may
wish to request EDD#%92s DE 231F, Information Sheet:
Temporary Services and Employee Leasing Industries, on
the subject of temporary service and leasing employers.)
Yes _____ No _____
8. Do you furnish the tools, equipment, or supplies used to
perform the work?
Independent business people furnish the tools, equipment,
and supplies needed to perform the work. Independent
contractors normally have an investment in the items
needed to complete their tasks.
Yes _____ No _____
9. Is the work considered unskilled or semi-skilled labor?
The courts and the California Unemployment Insurance
Appeals Board have held that workers who are considered
unskilled or semi-skilled are the type of workers the law is
meant to protect and are generally employees.
Yes _____ No _____
10. Do you provide training for the worker?
In skilled or semi-skilled work, independent contractors
usually do not need training. If training is required to do the
task, it is an indication that the worker is an employee.
Yes _____ No _____
11. Is the worker paid a fixed salary, an hourly wage, or
based on a piece rate basis?
Independent contractors agree to do a job and bill for the
service performed. Payments to independent contractors
for labor or services are made upon the completion of the
project or completion of the performance of specific
portions of the project.
Yes _____ No _____
12. Did the worker previously perform the same or similar
services for you as an employee?
If the worker previously performed the same or similar
services for you as an employee, it is an indication that the
individual is still an employee.
Yes _____ No _____
13. Does the worker believe that he or she is an employee?
Although belief of the parties is not controlling, intent of the
parties is a factor to consider when making an employment
or independent contractor determination. When both the
worker and principal believe the worker is an independent
contractor, an argument exists to support an independent
contractor relationship between the parties.
Yes _____ No _____
Interpretations of Answers
Depending on the services being performed and the type of occupation, this questionnaire may produce a variety of results. There may be some factors which lean toward employment and some which lean toward independence. The answers to questions 1 – 6
provide a strong indication of the presence or absence of direction and control. The answers to questions 7 – 13 when joined with other evidence may carry greater weight when indicating the presence or absence of direction and control.
1. If all of the answers to questions 1 – 3 are "No" and all of the answers to questions 4 – 6 are "Yes," there is an indication of independence. When this is the case, there are likely to be a number of "No" answers to questions 7 – 13 which add to the support of the
determination.
2. If all of the answers to questions 1 – 3 are "Yes" and all of the answers to questions 4 – 6 are "No," it is very strong indication that the worker in question is an employee. When this is the case, there are likely to be a number of "Yes" answers to questions 7 – 13
which add to the support of the determination.
3. If the answer to question 1 or 2 is "Yes" or the answer to any one of questions 4 – 6 is "No," there is a likelihood of employment. At the very least, this pattern of answers makes the determination more difficult since the responses to questions 7 – 13 will probably be mixed. In such situations, the business owner would be well advised to complete a DE 1870, giving all of the facts of the working relationship and requesting a ruling from EDD.
4. If the answer to question 3 is "Yes" and the answer to question 4 is "No," there is a likelihood of employment. Given this pattern of answers, it is probable that the answers to questions 5 and 6 will also be "No." When this happens you may also see more "Yes" answers to the last group of questions (7 – 13). This scenario would support an employment determination.
These four scenarios illustrate only a few combinations of answers that could result from the use of this Employment Determination Guide, depending on the working relationship a principal may have with a worker and the type of occupation. The more the pattern of
answers vary from the above four situations, the more difficult it is to interpret them. In situations 1 and 2, there is a greater chance that the interpretation will be accurate, and they present the least risk to the business owner of misclassifying the worker. With other combinations of answers, EDD recommends that business owners complete a DE 1870, giving a complete description of the working relationship and requesting a ruling from the Department.
NOTE: Some agent or commission drivers, traveling or city salespeople, homeworkers, artists, authors, and workers in the construction industry are employees by law even if they would otherwise be considered independent contractors under common law.
If you are dealing with workers in any of these fields, request the DE 231SE, Information Sheet: Statutory Employees, from the employment Tax Customer Service Office.
SOME EXAMPLES OF INDEPENDENT CONTRACTORS AND COMMON LAW EMPLOYEES
Independent Contractors
An attorney or accountant who has his or
her own office, advertises in the yellow
pages of the phone book under "Attorneys"
or "Accountants," bills clients by the hour, is
engaged by the job or paid an annual
retainer, and can hire a substitute to do the
work is an example of an independent
contractor.
An auto mechanic who has a station
license, a resale license, buys the parts
necessary for the repairs, sets his or her
own prices, collects from the customer,
sets his or her own hours and days of
work, and owns or rents the shop from a
third party is an example of an
independent contractor.
Dance instructors who select their own
dance routines to teach, locate and rent
their own facilities, provide their own sound
systems, music and clothing, collect fees
from customers, and are free to hire
assistants are examples of independent
contractors.
A repairperson who owns or rents a shop,
advertises the services to the public,
furnishes all of the tools, equipment, and
supplies necessary to make repairs, sets
the price for services, and collects from the
customers is an example of an independent
contractor.
Employees
An attorney or accountant who is employed
by a firm to handle their legal affairs or
financial records, works in an office at the
firm#%92s place of business, attends meetings
as needed, and the firm bills the clients and
pays the attorney or accountant on a
regular basis is an example of an
employee.
An auto mechanic working in someone#%92s
shop who is paid a percentage of the work
billed to the customer, where the owner of
the shop sets the prices, hours, and days
the shop is open, schedules the work, and
collects from the customers is an example
of an employee.
Dance instructors working in a health club
where the club sets hours of work, the
routines to be taught and pays the
instructors from fees collected from the
customers are examples of employees.
A repairperson working in a shop where
the owner sets the prices, the hours and
days the shop is open, and the
repairperson is paid a percentage of the
work done is an example of an employee.
NOTE: Payroll tax audits conducted by EDD have disclosed misclassified workers in virtually
every type and size of business. However, certain industries seem more prone to
have a higher number of misclassified workers than others. Historically, industries at
higher risk of having misclassified workers include businesses that use:
• Construction workers
• Seasonal workers
• Short-term or "casual" workers
• Outside salespersons