Independent Contractor Or Employee? Issues For Small Businesses In Classifying Software Developers And Other Technical Personnel Under California Law
January 2019
By Ethan Watts
Introduction
Many small businesses in California utilize independent contractors for work such as software development.1 Indeed, there are numerous online platforms catering to the independent contractor (or “freelance”) labor market, such as Freelancer, Toptal, Upwork and Elance (now operated by Upwork).2 But how confident can a small business in California be that the software developer or other technical personnel engaged on a freelance basis is properly classified as an independent contractor and not an employee? As noted by the California Supreme Court in a recent decision, the difference in classification is significant:
“[I]f a worker should properly be classified as an employee, the hiring business bears the responsibility of paying federal Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, providing worker’s compensation insurance, and, most relevant for the present case, complying with numerous state and federal statutes and regulations governing the wages, hours, and working conditions of employees. The worker then obtains the protection of the applicable labor laws and regulations. On the other hand, if a worker should properly be classified as an independent contractor, the business does not bear any of those costs or responsibilities, the worker obtains none of the numerous labor law benefits, and the public may be required under applicable laws to assume additional financial burdens with respect to such workers and their families.”
Dynamex Operations West, Inc.v. Sup.Ct. (Lee) (2018) 4 C 5th 903, 912-913.
Misclassifying workers can result in costly penalties and fines, and may also subject the business to claims by the misclassified employee (which can include claims for attorney’s fees and costs).
This article explores some of the issues faced by small businesses when engaging freelance software developers and other technical personnel. As discussed below, there are numerous factors to consider and this area of the law remains unclear for many small businesses attempting to properly determine whether personnel, such as software developers, can be properly classified as independent contractors.
California Case Law
In California, a multifactor standard set forth in the California Supreme Court’s seminal decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (“Borello”) is applied to determine whether a worker should be classified as an independent contractor or an employee.3 This standard is sometimes referred to as the “common law” or “Borello” test. See e.g. Ayala v. Antelope Valley Newspapers, Inc. (2014) 59 Cal.4th 522, 530-531. The Borello test involves the principal factor of “whether the person to whom services is rendered has the right to control the manner and means of accomplishing the result desired.” Borello, 48 Cal.3d 341, 350. Further, the Borello test also considers nine additional factors: “(1) right to discharge at will, without cause; (2) whether the one performing the services is engaged in a distinct occupation or business; (3) the kind of occupation, with reference to whether in the locality the work is usually done under the direction of the principal or by a specialist without supervision; (4) the skill required in the particular occupation; (5) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (6) the length of time for which the services are to be performed; (7) method of payment, whether by the time or by the job; (8) whether or not the work is part of the regular business of the principal; and (9) whether or not the parties believe they are creating the relationship of employer-employee.” As the California Supreme Court in Borello explained: “the individual factors cannot be applied mechanically as separate tests; they are intertwined and their weight depends often on particular combinations.” Borello, 48 Cal.3d at p. 351.
Prior to the 1989 Borello decision, California courts generally applied the common law “control of details” standard in determining worker classification. For example, in Tieberg v. Unemployment Ins. App. Bd. (1970) 2 Cal.3d 943, 946, in determining whether a worker was an employee or independent contractor for purposes of California’s unemployment insurance legislation, the court stated that “[ ]he principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.” But in addition to relying upon the control of details test, the pre-Borello decisions listed a number of “secondary” factors that could properly be considered in determining whether a worker was an employee or an independent contractor.
The Borello court also reviewed “the six-factor test developed by other jurisdictions which determine independent contractorship in light of the remedial purposes of the legislation.” Borello, 48 Cal.3d at p. 354. The Borello court stated that “all [of those factors] are logically pertinent to the inherently difficult determination whether a provider of service is an employee or an excluded independent contractor for purposes of workers’ compensation law.” Id. at p. 355. Thus, in determining whether a worker should properly be classified as an employee or an independent contractor under the California common law test, the Borello standard should be applied and it is also permissible to consider all of the various factors set forth in other California cases and the “six-factor test” developed in other jurisdictions.
Factors For Consideration In Classifying Software Developers
In turning to the factors applied by California courts under the “Borello” test, the most significant factor for a business in determining whether a software developer retained by the business is properly classified as an independent contractor is whether the business has control or the right to control the developer both as to the work done and the manner and means in which it is performed. In other words, if the business not only dictates what the software development project objectives are but also controls how the software developer goes about accomplishing the objectives, this primary factor will weigh in favor of classifying the software developer as an employee. However, “[i]f control may be exercised only as to the result of the work and not the means by which it is accomplished, an independent contractor relationship is established. [Citation.]” Tieberg v. Unemployment Ins.App. Bd. (1970) 2 Cal.3d 943, 946–947. Thus, while a business may retain a freelance software developer and control the project objectives, if the software developer has control over how he or she accomplishes the project objectives, this will weigh in favor of classifying the software developer as an independent contractor.
Additional factors that may be relevant in determining whether a software developer should be classified as an independent contractor or employee include the following:
Whether the developer is engaged in an occupation or business distinct from the business engaging the developer and whether or not the work the developer does is a part of the business’ regular business. The more distinct the services or products provided by the business retaining the developer from the development services performed by the developer, the more likely this factor will weigh in favor of classifying the developer as an independent contractor. For example, if the business retaining the developer is in the business of selling lawnmowers, and the developer has his or her own freelance database software development business, then, if the business retains the developer to design a database for customer management, this factor would likely weigh in favor of classifying the developer as an independent contractor.
Whether the business or the developer supplies the instrumentalities, tools, and the place for doing the work. For example, if the business engaging the developer provides the office space, computer and developer tools used by the developer to perform the work, then this factor will likely weigh in favor of classifying the developer as an employee. On the other hand, if the developer works from his or her own office, and uses all of his or her own equipment and tools (computer, developer tools, etc.), then this factor will likely weigh in favor of finding the developer an independent contractor.
The developer’s investment in the equipment or materials required by his or her task or his or her employment of helpers. Similar to the factor above, if the developer has purchased or otherwise obtained his or her own computer, developer tools, licenses, etc. needed for the development work, then this factor will likely weigh in favor of an independent contractor classification. Further, if the developer employs his or her own staff to assist with the work, this will further weigh in favor of classifying the developer as an independent contractor.
Whether the service rendered by the developer requires a special skill. In most circumstances this factor will likely weigh in favor of classifying the developer as an independent contractor. Unlike the farm laborers in the Borello case who performed simple manual labor, the work typically performed by software developers and other technical personnel is not the type of work “which can be performed in only one correct way.” Borello, 48 Cal.3d at p. 356. Indeed, there could be numerous ways in which a software developer could achieve a particular project objective.
The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision. For San Diego and many other localities in California, this factor could cut both ways. Depending on the circumstances, it is easy to imagine that a proponent of classifying an individual as an independent contractor could find plenty of examples of software development work being done by specialists without supervision. Independent contractor Web developers, for example, routinely provide their services to clients without “supervision.” On the other hand, a proponent of classifying an individual as an employee, in certain circumstances, would likely find examples of software development work being done under the direction of a principal, such as at a software development company.
The developer’s opportunity for profit or loss depending on his or her managerial skill. If numerous other factors discussed above favor finding an independent contractor relationship, then this factor too will likely weigh in favor of classifying the developer as an independent contractor. In those circumstances, the developer would control the manner and means in which he or she provides the software development services, will be engaged in his or her own software development business distinct from the client’s business, will have invested in and provided his or her own equipment and tools for the work, will work out of his or her own office, etc. In these circumstances, a software developer’s managerial skill could determine his or her ability to control costs and to profit from the work undertaken.
The length of time for which the services are to be performed. Shorter periods of time for the completion of services will weigh in favor of an independent contractor relationship, while longer periods of time will at some point may weigh in favor of an employer-employee relationship.
The degree of permanence of the working relationship. Similar to the factor discussed above, the more permanent the working relationship, the more it tends to favor classifying the developer as an employee.
The method of payment, whether by time or by the job. For example, if the developer’s payment is conditioned upon project completion (or milestones), the arrangement would favor finding an independent contractor relationship. On the other hand, hourly payment or payment otherwise based on time spent would tend to favor classifying the software developer as an employee. However, like other factors discussed, this factor by itself is not determinative. For example, hourly payment has been found to be consistent with an independent contractor relationship. See Varisco v. Gateway Science & Engineering, Inc. (2008) 166 Cal.App.4th 1099 at 1106 (stating “independent contractors are now commonly paid on that basis” citing to National Elevator Services, Inc. v. Department of Industrial Relations (1982) 136 Cal.App.3d 131, 140, 186 Cal.Rptr. 165.) Furthermore, even if paid hourly or otherwise by time, if the developer is free to set his or her own hours, this could weigh in favor of finding an independent contractor relationship. See Varisco, 166 Cal.App.4th 1099 at 1105.
Whether or not the parties believe they are creating an employer-employee relationship. If both the business and the software developer believe they are entering into an independent contractor relationship, then clearly this would weigh in favor of finding the developer to be an independent contractor. An agreement between the business and developer setting out the details of the relationship is a “significant factor for consideration.” Tieberg, 2 Cal.3d 943, 951-952. However, as with other factors, it is not determinative.
The right to discharge at will, without cause. Such a right by the business to terminate the developer at will, without cause, would weigh in favor of classifying the developer as an employee. Once again, however, this factor by itself is not determinative. A termination at-will clause for both parties may properly be included in an independent contractor agreement, and is not by itself a basis for changing that relationship to one of an employee. Varisco, 166 Cal.App.4th 1099, 1107; see also State Compensation Insurance Fund v. Brown (1995) 32 CA 4th 188.
Conclusion
In California, businesses must consider numerous factors under the “common law” test in determining whether a software developer should be classified as an independent contractor or employee. While the principal factor for consideration is whether the business has control or the right to control the developer both as to the work done and the manner and means in which it is performed, there are numerous secondary factors that may impact the analysis.
Footnotes:
1 See, for example, the article at: https://www.techrepublic.com/article/the-top-programming-skills-employers-want-from-freelancers-in-2019/ .
2 See Freelancer, Toptal, Upwork and Elance (now operated by Upwork - see https://en.wikipedia.org/wiki/Elance).
3 For purposes of California wage orders, the California Supreme Court in Dynamex Operations West, Inc.v. Sup.Ct. (Lee) (2018) 4 C 5th 903 held that the test for determining whether an individual should be classified as an employee is broader than the “common law” or “Borello” test. Under Dynamex, the wage orders language requires application of the “ABC test” under which workers are presumed employees unless the hirer can prove: (A) the worker is free from the hirer's control and direction; (B) the worker performs work outside the usual course of the hirer's business; and (C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature involved in the work performed. Dynamex Operations West, Inc.v. Sup.Ct. (Lee) (2018) 4 C 5th 903, 964.
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The above discussion is intended to be a general commentary on legal issues. Each situation is different and this article is not intended as legal advice. Further, nothing in this article is intended to create an attorney-client relationship.