New Battle over Independent Contractors
A
recent California Court of Appeal holding that couriers were not
independent contractors, but employees, has sent shockwaves through the
business community. The court upheld a stop work order issued by the
Division of Labor Standards Enforcement finding the company did not have
workers' compensation coverage for the drivers.
Facts of the Case
JKH
Enterprises, doing business as AAA Courier, provides courier services to
Bay Area businesses such as law firms and title companies. The drivers pick
up packages and deliver them to their designated location.
When
hiring drivers, JKH has each potential employee fill out a form called
"Independent Contractor Profile" and an application on which the
driver acknowledged that she/he would be an independent contractor and
would provide his/her own automobile insurance.
The
drivers used their own cars to make the deliveries. They paid for their own
gas, car service, maintenance, and insurance. They mostly used their own
cell phones to communicate with JKH.
The
drivers set their own schedules and driving routes. Their work was not
directly supervised by JKH, and JKH had only a "vague idea" of
where its drivers were during the day. The drivers are not required to
report to the main office. The drivers take time off when they want to and
do not need to ask permission. The owner of JKH has never even met some of
the drivers.
The
drivers’ cars do not bear any logos related to JKH; nor do the drivers wear
badges, uniforms or any other information identifying them with JKH. The
drivers receive no particular training, other than instruction on how to
fill out log sheets.
Some
of the drivers also work for other delivery companies. Two of the drivers
even have their own business license and provide the delivery service on
behalf of their own business.
The
drivers are paid twice a month. No deductions are taken. They are not
issued a W-2, but a Form 1099. The drivers are not provided any benefits.
The
drivers turn in delivery logs that are used to bill customers, but do not
turn in any time sheets.
DLSE Determination and Penalty
In 2004, Deputy Labor Commissioner Benny Cheng inspected JKH's offices. He spoke to the dispatcher who informed
him that he relayed information to the drivers about where to pick up
packages. Based on this, Cheng concluded that the drivers were making
deliveries for the company, performing the actual work of the day-to-day
business, and under the control of the company.
The
Commissioner issued a "Stop Order—Penalty Assessment" and fined
JKH $16,000—$1,000 for each driver that was working the day of the
inspection. The Commissioner based its decision on its determination that JKH's drivers should be properly classified as
employees, as opposed to independent contractors, and that JKH had failed
to procure workers' compensation insurance for their benefit in violation
of Labor Code section 3700.
JKH
contested the order and assessment and requested a hearing before the DLSE.
In a written decision, the hearing officer upheld the order and penalty,
reduced by $1,000 for one driver who was conducting a delivery business
under a separate business license.
The
DLSE found that:
"Although
some of the factors in this case can be indicative of the workers being
independent contractors, the overriding factor is that the persons
performing the work are not engaged in occupations or businesses distinct
from that of [JKH]. Rather, their work is the basis for [JKH's] business."
The
DLSE further explained:
"[JKH]
obtains the clients who are in need of delivery services and provides the
workers who conduct the service on behalf of [JKH]. In addition, even
though there is an absence of control over the details, an
employee-employer relationship will be found if the [principal] retains
pervasive control over the operation as a whole, the worker's duties are an
integral part of the operation, and the nature of the work makes detailed
control unnecessary."
JKH
brought a petition for writ of mandamus to the trial court challenging the
DLSE order. The trial court upheld the DLSE order, and this appeal ensued.
Court of Appeal Decision
JHK
argued that the drivers were independent contractors. It emphasized its
lack of control over the details of the work, the drivers' use of their own
cars, and the presence of the "Independent Contractor Profiles"
signed by the drivers.
However,
the court disagreed. The court noted that generally the degree of control
exercised over the worker is important. However, it is not the only factor
to be considered in the workers' compensation context because of the
history and remedial and social purpose of workers' compensation.
The
court held that:
"[T]he
functions performed by the drivers, pick-up and delivery of papers or
packages and driving in between, did not require a high degree of skill.
And the functions constituted the integral heart of JKH's
courier service business. By obtaining the clients in need of the service
and providing the workers to conduct it, JKH retained all necessary control
over the operation as a whole."
The
court concluded:
"[T]hese circumstances are enough to find an employment
relationship for purposes of the Workers' Compensation Act, even in the
absence of JKH exercising control over the details of the work and with JKH
being more concerned with the results of the work rather than the means of
its accomplishment. And neither JKH's nor the
drivers' own perception of their relationship as one of independent
contracting, or any other single factor, either alone or in combination,
mandates a different result."
The
court noted that it was limiting its finding to the specific purposes of
the Workers' Compensation Act. In other words, while these drivers may be
considered employee's for purposes of workers' compensation coverage, they
may not meet the employee test for other purposes, such as tax liability or
liability for worker negligence.
The
court also has to give deference to the agency. Under the applicable
standard of review, the court was limited to "examining the whole
administrative record to determine if the Department's findings and order
are supported by substantial evidence, it is not our function to reweigh
the evidence or the particular factors cited by the Department in support
of its decision, to which we afford considerable deference."
What Should Employers Do
The
case is significant for California
employers. It appeared as if JKH had done everything correctly to establish
an independent contractor relationship with these drivers.
The
language in this case is very pro-employee. However, the court did note
that the case was limited to the workers' compensation context, and it
would be evaluated differently in other contexts.
This case
emphasizes that the DLSE will take the issue of workers' compensation
coverage seriously. The practical effect is that it is better to obtain
coverage for independent contractors than to risk the penalties of the
DLSE.
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