Misclassifying a worker as an independent contractor (rather than an employee) creates significant monetary liability including wage/hour and overtime issues, exposure to unfair business practice lawsuits, tax liability and penalties, and potential criminal liability. While misclassification has always been a concern, a series of recent cases, regulatory action and media attention have again thrust the issue into the California legal limelight.

The California Court of Appeal recently held in two different cases that the workers at issue were misclassified as independent contractors: Air Couriers International v. Employment Development Department (April 12, 2007); and JKH v. Department of Industrial Relations (August 22, 2006). In doing so, the Court signaled that an independent contractor designation will be closely scrutinized for compliance with the law.

These cases also highlight that the independent contractor analysis tends to be context specific. Indeed, different tests may apply depending on whether the issue is a wage or overtime claim, an unemployment insurance claim, employment tax liability, workers' compensation coverage, or protection under anti-discrimination laws.

Irrespective of context, two important factors in the analysis are as follows:

• the extent to which the services rendered by the worker are integral to the business; and
• whether the employer has the right to control not only the result of the work, but also the methodology of accomplishing the result.

A determination that the worker's services are integral to the business and that the employer controls the worker's methodology of accomplishing the work would tend to support a finding that the worker should be classified as an employee, not an independent contractor.

Coming on the heels of these decisions, it has been reported that the Attorney General of California is assembling a special unit to coordinate enforcement efforts and to police instances of misclassification. This governmental effort, combined with increased private party lawsuits against employers, suggests that California employers should ensure that anyone classified as an independent contractor meets the legal test applicable to such classification. Doing so now, rather than in response to a threatened claim, can substantially reduce legal risk and monetary exposure.