Issue 2 - 2004

On April 23, 2004, the United States Department of Labor ("DOL") published new regulations concerning how employers determine who is exempt from the minimum wage and overtime requirements under the Fair Labor Standards Act ("FLSA"). Unless over-ridden by an act of Congress, those regulations go into effect on August 23, 2004. Under the new federal standard, the minimum salary level necessary to classify an employee as exempt is now $455.00 per week ($23,660 per year). The regulations clarify the salary deductions an employer can make without losing an employee's exempt status under the "salary basis" test, and streamline "job duties" tests. While the new federal standards provide a bright "bottom line" standard, employers must also adhere to state standards. For California employers, the new federal fair play standard won't play.

California's legal standards have historically exceeded federal standards on nearly every level. Overtime exemptions are no exception. Under California law, the salary exempt minimum salary is $2,340.00 per month ($28,080.00 per year). The Industrial Welfare Commission's wage orders contain separate definitions for the three types of white-collar exemptions: executive, administrative, and professional personnel. California's definitions, based only in part on the regulations establishing the conditions for exemption status under the federal FLSA, contain tougher limits than the federal standard.

For California to adopt the features of the newly amended federal regulation would take an act of the Industrial Welfare Commission ("IWC"). On July 1, 2004, however, the California Legislature defunded the IWC after the IWC failed to act to increase minimum wage for the past two years. The Legislature established the IWC in 1913 to set minimum wages and working conditions for women and children. The commission evolved over the years to become California's primary entity with the authority to provide for minimum wages and for the general welfare of California employees. Without action of the IWC adopting the new federal regulations, those new federal regulations will have little or no impact on California employers - they will get "no play."

This is not the first time the IWC has been defunded. In 1998, Governor Pete Wilson defunded the IWC when it repealed daily overtime rules. The Gray Davis administration revived it in 1999 following the reinstatement of daily overtime rules. The IWC's official status notwithstanding, IWC wage orders are still in effect.

The Department of Labor Standards Enforcement will continue to enforce the provisions of wage orders. You can download the wage orders from the Director of Industrial Relations website located at http://www.dir.ca.gov/WP.asp or by calling 415-703-5070 to request copies.

In a decision that affects workplace investigation practices, the National Labor Relations Board (NLRB) recently ruled that a non-union employee does not have the right to have a representative present during an interview that might lead to disciplinary action. This ruling reverses a prior NLRB decision, and reestablishes a key distinction between the rights of non-union versus union employees.

In this recent case (IBM Corporation and Schult, et al. (2004) 341 NLRB No. 148), IBM Corporation (IBM) sought to interview three non-union employees in connection with a workplace harassment investigation. Each employee requested - and IBM denied - the right to have a coworker present during their interview. The interviews proceeded, and the employees were subsequently terminated. Following their terminations, the employees filed unfair labor practices charges against IBM, alleging that the denial of representation during the investigatory interviews was unlawful. Relying on a 2000 NLRB decision, an administrative law judge ruled that IBM had violated the National Labor Relations Act in denying the employees' requests.

On appeal, the NLRB reversed its prior decision, ruling that IBM was not required to allow the non-union employees representation during the investigatory interviews. The NLRB's decision was based on policy issues underlying an employer's need to conduct private and discreet interviews with employees regarding sensitive workplace issues, and noted that the confidentiality of such interviews would be compromised by the inclusion of coworker representatives. The NLRB stated that although an employee has the right to ask for a coworker to be present during investigatory interviews (and cannot be disciplined for asking), the employer had no obligation to grant such request, because "the right of an employee to a coworker's presence in the absence of a union is outweighed by an employer's right to conduct prompt, efficient, thorough, and confidential workplace investigations."

Merely having a worker sign an independent contractor agreement and treating him or her as an independent contractor for tax purposes does not make the worker an independent contractor. Generally, a worker is not an independent contractor if the company has the right to control and direct the worker as to the details and means by which the project is accomplished. If the contracting company exercises control only as to the results of the work, the worker may be an independent contractor. However, the right to control is important, not whether a company actually exerts any control. Many factors have been developed by federal and state agencies and courts to determine if control is exercised by a company.

Below are twenty common factors used in deciding whether a company controls the work of a worker. Independent contractors do not have to satisfy all twenty factors. Think of the factors as weights on a balance sheet. For a hiring firm to prove that a worker is an independent contractor, most of the factors must be on the independent contractor side of the scale. If some factors lean towards the employee side, the hiring firm must show that the other factors offset them. The courts have given different weight to each factor according to the industry and the job. Unfortunately, this has been done informally on a case by case basis, so there are no official weights for a given industry.

The twenty common most factors are:

1. No Instructions. Contractors are not required to follow instructions to accomplish a job. They should not even receive any instructions on a job. However, they can be provided job specifications by the hiring firm.

2. No Training. Independent contractors typically do not receive training by the hiring firm. They use their own methods and skills to accomplish the work.

3. Services Do Not Have to Be Rendered Personally. Contractors are hired to provide a result only and usually have the right to hire their own employees to do the actual work.

4. Work Not Essential to the Hiring Firm. A company's success or continuation should not depend on the service of outside contractors. In other words, an independent contractor should not be "a cog in the wheel" of the business. For example, a standard production employee of the company would not be an independent contractor.

5. Set Own Work Hours. Independent contractors are allowed to set their own work hours.

6. Not a Continuing Relationship. Usually independent contractors do not have a continuing relationship with the hiring company. They are hired to perform particular projects with definite time limits. The relationship can be frequent, but it must be at irregular intervals or whenever work is available.

7. Control Their Own Assistants. Contractors are allowed to hire their own assistant/employees at their discretion. Contractors should not hire, supervise or pay employees at the direction of the hiring company.

8. Time to Pursue Other Work. Contractors should have enough time available to pursue other gainful work. They are in business for themselves and normally work for more than one company.

9. Independent Contractors Decide the Job Location. Independent contractors normally control where they work. If they must work on the premises of the hiring company due to the nature of the work, it is not under the company's direction and supervision.

10. Sequence of Work. Independent contractors determine in what order they will perform the work since they are in charge of the process. The hiring company is only interested in the results of the work.

11. No Interim Reports. Independent contractors are hired for the final result and therefore normally they should not be asked for progress or interim reports.

12. Paid By the Job. Independent contractors are paid by the job, not by the time as a general rule. Payment by the job can include periodic payments based on the percentage of job completed. Payment can be based on the number of hours needed to do the job times a fixed hourly rate. However, this should be determined before the job begins. This is consistent with the notion that the hiring company is only concerned with the results of the project.

13. Work For Multiple Firms. Independent contractors often work for more than one firm at a time and should be allowed to do so.

14. Paid Business Expenses. Independent contractors are in business for themselves and therefore are generally responsible for their incidental expenses.

15. They Have Their Own Tools. Usually, independent contractors furnish their own tools.

16. Significant Investment in Their Businesses. An independent contractor should be able to perform his/her services without the hiring company's facilities (equipment, office furniture, machinery, etc.) as a normal rule. Independent contractors investment in their own business must be real, substantial and adequate.

17. Independent Contractor Offers Services to the General Public. Independent contractors make their services available to the general public since they are in business for themselves. Factors indicating someone is offering his/her business to the general public include: having an office and assistants; having business signs; having a business license; listing their services in the business directory; and advertising their services.

18. Can Make Entrepreneur Profit or Loss. Independent contractors are in business for themselves so they have the ability to make a profit or a loss. Employees don't suffer losses. Examples of circumstances showing that a profit or loss is possible include the following: if the contractor hires, directs and pays its employees; if the contractor has his own office, equipment, materials, or facilities; if the contractor has a continuing and reoccurring liability; if the contractor has agreed to perform specific jobs for prices agreed upon in advance; and if the contractor's services affect his own business reputation.

19. Cannot be Fired at Will. Independent contractors cannot be fired so long as they produce the result which is "contracted for" and meets the contract specifications. Employees however can be terminated at-will pursuant to an at-will arrangement.

20. No Compensation for Noncompletion. Contractors are responsible for the satisfactory completion of a job or they may be legally obligated to compensate the hiring firm for failure to complete.



Which factors are most important? The main factor, of course, is control. All the twenty factors must be used to form an overall picture of the working relationship between the hiring firm and each worker. A better question to ask is: "Why does not this worker meet factor number ___?" If the reason is that you want to keep control over the worker, that factor is very important. If the factor is not applicable for that job, or if you have specific reasons other than the need to control the job or worker, that factor may be less important. The bottom line is: if any indication shows a right or ability to control a worker, that worker will be an employee. Be sure your Company has the right legal input in making independent contractor determinations.