SB 459 and Independent Contractor Status

In the wake of SB 459, effective January 1, 2012, California employers seeking guidance regarding the proper classification of independent contractors can look to the recent case of Arnold v. Mutual of Omaha Insurance Co., 2012 DJDAR 71 (December 30, 2011), wherein the Court analyzed the standard for properly classifying individuals as independent contractors under California law.

Arnold involved claims under Labor Code Section 2802 (failure to provide expense reimbursements), Labor Code Section 203 (failure to timely pay wages upon discharge) and Business & Professions Code Section 17200 (unfair business practices bases on the purported Labor Code violations) brought by an independent contractor insurance agent (individually and as putative class representative) against Mutual of Omaha. The Company obtained summary judgment on the basis that the plaintiff’s status as an independent contractor prevented her from pursuing the Labor Code claims (and the derivative B&P 17200 claim), which provide protections to employees but not independent contractors.

The plaintiff made two primary arguments on appeal. First, the plaintiff argued that the court should have relied on Labor Code Section 2750 and not the “common law test” to determine whether she was an employee or independent contractor for purposes of her Labor Code claims. Second, the plaintiff argued that she was an employee even if the common law test applied. After dispensing with the plaintiff’s Labor Code Section 2750 argument, the court of appeal went on to provide a detailed application of the applicable “common law test.”

The Common Law Test

Relying on S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.App.3d 341 (1989), the court in Arnold applied the common law test, which includes a primary test and secondary factors, as follows:

A. Primary Test – Right to Control, i.e., whether the principal receiving service has the right to control the manner and means of accomplishing the result desired.

B. Secondary Factors:

•· Whether the relationship can be terminated at will, without cause?

•· Whether the individual performing services engaged in a distinct occupation or business?

•· Whether 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;

•· The skill required in the particular occupation;

•· Whether the principal or the worker supplies the instrumentalities, tools, and the place or work for the person doing the work;

•· The length of time for which the services are to be performed;

•· The method of payment, whether by the time or by the job;

•· Whether or not the work is part of the regular business of the principal;

•· And whether or not the parties believe they are creating the relationship of employer-employee.

Application of Common Law Test

The court then applied the common law test to the job of insurance agent held by the plaintiff. Concerning the principal test, the court listed the following points: (i) plaintiff “used her own judgment in determining whom she would solicit for applications for [the company’s] products; (ii) plaintiff determined “the time, place and manner in which she would solicit, and the amount of time she spent soliciting for [company’s] products;” (iii) plaintiff’s appointment with the company “was nonexclusive, and she in fact solicited for other insurance companies during her appointment with [the company];” (iv) plaintiff’s assistant general manager at the company “did not evaluate [plaintiff’s] performance and did not monitor or supervise [plaintiff’s] work;” (v) plaintiff’s participation in company training “was voluntary for agents, except as required by state law;” (vi) agents (like plaintiff) “who chose to use [the company’s] office were required to pay a fee for their workspace and telephone service;” and (v) plaintiff’s “minimal performance requirement to avoid automatic termination of her appointment was to submit one application for [the company’s] products within each 180-day period.” Based on its analysis, the court concluded that under the principal test, the Company “had no significant right to control the manner and means by which the [plaintiff/insurance agent] accomplished the results” desired.

The court then applied the secondary factors. As for termination of the relationship, the court stated “[a]lthough [the company] could terminate the appointment at will, a termination at-will clause for both parties may be included in an independent contractor agreement and is not by itself a basis for changing that relationship to one of an employee.” The court also found the following factors to be significant: (i) plaintiff “was engaged in a distinct occupation requiring a license from the Department of Insurance;” (ii) plaintiff was “responsible for her own instrumentalities or tools with the exception of limited resources officer by [the company] to enhance their agents’ successful solicitation of their products;” (iii) plaintiff’s pay, which was “chiefly commissions,” “was based on her results and not on the amount of time she spent working on [the company’s] behalf;” and (iv) that plaintiff and the company “both believed, at the time of [plaintiff’s] appointment, they were creating an independent contractor relationship and not an employee relationship.” The Court concluded that these factors “also weigh in favor of finding an independent contractor relationship.”

In Arnold, the court had “little difficulty” concluding that the trial court had correctly concluded that the plaintiff was an independent contractor and not an employee. Many other relationships will be a much closer call on the issue of independent contractor/employee than the one presented in Arnold. Nevertheless, Arnold provides a starting point for evaluating whether an individual is properly classified as an independent contractor or employee. However, Employers with questions about the proper classification of independent contractors are advised to consult with an experienced employment attorney.

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