We’ve had to lay off some employees – are there legal issues if we hire a former employee as an independent contractor?

If your former employee does not meet the legal tests to be classified as an independent contractor, no written agreement in the world will make her one. In fact, her previous status as an employee could be a red flag indicating misclassification, especially if your former employee’s duties as an independent contractor are no different from her duties as an employee.

Various Tests

Courts and administrative agencies apply different legal tests to determine whether a worker is an employee or an independent contractor. In general, California uses what is known as “the ABC test” to determine whether an individual is an employee or an independent contractor. Under the ABC test, an individual is presumed to be an employee, unless the hiring company can prove that the worker:

• Is free from control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
• Performs work that is outside the usual course of the hiring entity’s business; and
• Is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.

With a former employee, it would be hard to meet the second prong of the test — that the worker is now performing work outside of your company’s usual course of business, If the worker is doing the same job they did as an employee, the worker is likely an employee not an independent contractor for wage and hour purposes.

California law provides a number of exceptions to the ABC test. If an exception applies, then courts and agencies will apply the test specified in the statutory exception, usually the common law Borello test that focuses on the hiring entity’s right to control the manner and means of performing the work (sometimes referred to as the “right to control” test), along with a number of other factors.

If these legal tests are not met, any agreement between worker and hiring party purporting to establish an independent contractor relationship may be invalid.

Because different tests are applied depending on the legal issue, employers should always consult with legal counsel to make sure workers classified as independent contractors can meet the applicable legal requirements. Improperly classifying employees as independent contractors can expose a company to liability for unpaid taxes, workers’ compensation, unemployment and disability insurance, as well as violation of wage and hour laws.

You can find more information on Independent Contractors in the HR Library.