More Liability for Using Independent Contractors

A California Chamber of Commerce-opposed “job killer” bill that completely undermines the legal significance of the independent contractor relationship passed a Senate committee on May 8.

SB 556 (Corbett; D-San Leandro), newly identified as a “job killer,” unfairly imposes liability on any contracting entity for the damages caused by the contractor or contractor’s employees, including wage-and-hour violations, penalties, fines, and willful misconduct, solely on the basis that the contractor or its employees wore a uniform similar to that of the contracting entity or drove a vehicle with the contracting entity’s logo.

Daunting Task

The independent contractor analysis is a daunting task for any business. The three state agencies (Employment Development Department, Franchise Tax Board, and Department of Industrial Relations) that determine whether a worker has been properly classified as an employee versus an independent contractor use three different tests that result in different determinations.

Each test includes extremely subjective factors that can easily be interpreted either in favor of or against the classification of an individual as an independent contractor.

One key factor that is present in all three tests is the degree of control the entity retains and exercises over the independent contractor or its employees. If the entity exerts too much control, the individual and its employees may be the employees of the contracting entity and therefore liable for the wages, taxes and insurance of those individuals.

Assuming a business is able to navigate any of the three tests correctly and properly classify the individual as an independent contractor, both the business and independent contractor enjoy benefits from the relationship. The independent contractor is able to control his/her profits, losses and schedule while the business manages its costs. The business is liable for the negligent acts of the independent contractor as an agent of the business.

Liability for any other willful conduct or labor violations of the independent contractor with respect to its employees, however, is borne by the independent contractor (which employs the individuals), not the business that contracts with the independent contractor.

Increases Liability

SB 556 completely ignores the legal significance of the independent contractor relationship, and imposes liability against the contracting entity for any damages caused by the contractor or contractor’s employees, solely on the basis that the contractor or its employees wore a uniform that was substantially similar to that of the contracting entity or displayed the contracting entity’s logo on its vehicle that made the public believe such individuals were employees of the contracting entity.

To the CalChamber’s knowledge, it is unprecedented to extend liability for wage-and-hour violations or intentional conduct to a third party solely on the basis of appearances.

Rather, as set forth above, the main inquiry is whether that third party exerted sufficient control over the duties, performance and conduct of the contracting party to justify extension of liability. SB 556 undermines this analysis entirely.

Any doubt as to the intent of SB 556 to undermine the independent contractor relationship is easily resolved by the strategic placement of the bill’s provisions in the Labor Code instead of the Civil Code, which generally dictates liability between a principal and agent.

Specifically, “damages” under the Labor Code include wages, penalties, statutory fines and attorney fees, whereas the Civil Code generally resolves personal injuries or torts.

Including SB 556 within the Labor Code also triggers the Private Attorney General Act, which allows an individual to bring a “representative action” for unpaid wages and penalties for violations of the Labor Code, thereby expanding the threat of frivolous litigation against any entity that utilizes independent contractors.

No Harm

Finally, there is no evidence that any member of the public is confused, harmed, or damaged in any way based upon a mistaken belief that the independent contractor is an employee of the company.

Specifically, there is no proof that any company has refused to stand behind the services provided or resolve a customer complaint on the basis that the individual performing the services was an independent contractor versus an employee.

There also is no evidence that any member of the public was harmed based upon a mistaken belief as to the employment relationship between an individual and the contracting company. Accordingly, there is no consumer protection need for this bill.

Key Vote

SB 556 passed the Senate Labor and Industrial Relations Committee, 4-0.

Ayes: Leno (D-San Francisco), Lieu (D-Torrance), Padilla (D-Pacoima), Yee (D-San Francisco/San Mateo).

No vote recorded: Wyland (R-Escondido).