Thanks to a new opinion letter by the California Department of Labor Standards Enforcement (DLSE), California employers have a new tool for cutting employment costs during the down economy.  The opinion letters, taken together with Wage Orders and the California Labor Code constitute the bulk of rules governing wage and hour compliance in California.

The August 19, 2009 opinion letter now authorizes employers to reduce exempt employees’ workweek from 5 days to 4 days, along with a 20% pay reduction, without violating the exemption classification, so long as the employee still meets the minimum requirements for exempt status, such as the minimum salary (currently 2 times minimum wage based on full time employment, or $2,773.33 per month) and the overall work duty requirements.

The opinion letter was in response to an inquiry by an employer experiencing economic difficulties who sought to reduce hours and salary until economic conditions improved.

When hiring someone to complete a project or series of tasks for you, it is sometimes tempting for the person doing the hiring to classify that worker as an independent contractor.  It is cheaper for the person doing the hiring because employment taxes do not have to be paid, certain insurance requirements do not have to be met, and certain benefits do not have be provided. Also the employer may not have to comply with wage and hour laws (i.e., overtime, meal and rest periods, reporting time pay, etc..).

This is why some businesses go ahead and classify that new worker as an independent contractor rather than an employee. But just because the business classifies the worker as an independent contractor, does not mean the various regulatory agencies will do the same, and doing so may get the business in trouble.  Regulatory agencies favor the employee and the employee model of hiring for work.  The IRS and State Franchise Tax Board would also like for you to designate the person as an employee so you have to pay the employment taxes.  They lose countless amounts of money each year to underreported self employment income.

In order to stay out of trouble with the various regulatory agencies you need to weigh several factors (developed by case law) to determine whether the person is truly an independent contractor or an actual employee. You should keep records of the decision and why the decision was made. You want information in the file that will support your decision that the person really is an independent contractor, if you go with that classification.   Generally speaking, the more control you exert over the person, the more likely the person will be classified as an employee. If you direct their work, tell them when they have to report, pay for their tools or supplies, give them any training, set the hours of work, require they only work for you, and things of this nature, you have likely exerted sufficient control over the person for them to be classified as an employee.  If the person doing the work uses their own tools, can subcontract the work to someone else, can report to work on their schedule, does work for various other individuals or businesses, provides their own training, and does not have to report like other employees, tends to suggest the person is a true independent contractor.

There are other factors different agencies look at, and some safe harbor provisions an attorney can advise you about.

The IRS has a publication discussing worker classfications.  Visit the Department of Labor’s site for discussion related to proper classification here.  Finally, the Employment Development Department has an valuable resource here.

You should also have an independent contract agreement in place with anyone you designate as an independent contractor to recite all the facets of the agreement and memorialize the lack of control you have exerted over the person in terms of the business relationship.

Minimum Wage Update: Employers, please remember that effective July 24, 2009, the federal minimum wage has increased from $6.55 per hour to $7.25 per hour. While the increase will not impact California employers, who are already bound to comply with California’s higher minimum wage of $8.00 per hour, you should be sure your labor posters refer to this new standard. Multi-state employers need to be mindful of the federal minimum wage increase and ensure compliance.
You can visit www.calchamber.com or www.calbizcentral.com for updated posters.