EDD Independent Contractor Ruling Foils California Labor Commissioner

Who is an “independent contractor?”  This is a very misunderstood question in employment and labor law.  And no, just because you “1099” them does not make them an independent contractor.

There are legal rules that determine who is an independent contractor.  And if the worker is not an independent contractor, they are your employee.

Just because you meet the legal test for independent contractor status for one legal purpose does not mean you are home free.  Each state (and federal agency) has their own “independent contractor” test.  The tests are supposed to be the same, but in practice the outcomes are inconsistent and often unpredictable.

Thankfully a recent case interjects some sanity in an otherwise chaotic legal world for California employers.

Happy Nails & Spa v. Labor Commissioner (7/19/2013) Case

Happy Nails & Spa treated cosmetologists who worked at their nail salons as independent contractors rather than employees.  The California Employment Development Department (EDD) audited Happy Nails and found the cosmetologists to be employees, not independent contractors.  As a result, EDD assessed Happy Nails back taxes, penalties and interest on Happy Nails’ “employees.”   Happy Nails challenged the EDD audit results and after a full hearing on the merits obtained a ruling that the cosmetologists were independent contractors.

Meanwhile, the DLSE (Labor Commissioner’s enforcement arm) also audited Happy Nails and issued a penalty citation.  Happy Nails had failed to provide itemized wage statements to the cosmetologists under Labor Code section 226.  The DLSE citation required a finding that the cosmetologists were Happy Nails’ “employees,” contrary to the “independent contractor” ruling before the EDD.

At the hearing before the Labor Commissioner, Happy Nails argued the cosmetologists were independent contractors for EDD purposes so they should be independent contractors for Labor Commissioner purposes too.  The Labor Commissioner ignored Happy Nails’ argument and ruled the cosmetologists were Happy Nails’ “employees.”

Happy Nails appealed to the superior court and ultimately to the 4^th District Court of Appeals.

The Court of Appeals agreed with Happy Nails.  Because Happy Nails had already won before the EDD, the cosmetologists were also independent contractors for Labor Commissioner purposes as well.  This is known as “collateral estoppel.”  In essence, an issue once decided is final and cannot be tried again in a different forum.

So Happy Nails Won, Or Did It?

What do you think?  Was the long drawn out legal battle worth it?

Happy Nails is quoted as telling the Labor Commissioner it had “already spent hundreds of thousands of dollars, and borne the burden of years of administrative proceedings, to determine that [its] [c]osmetologists are not employees.”  This of course mattered not to the Labor Commissioner and Happy Nails had to go above the Labor Commissioner for its ultimate (second) victory.

This took even more years of legal wrangling and who knows how many more hundreds of thousands of dollars.  So did Happy Nails win?

As employers, just be thankful Happy Nails had the financial ability and intestinal fortitude to fight two California administrative bodies to vindicate its rights.  The result: a ruling all California employers can use.

Take Aways From Happy Nails & Spa

1. This is a good case for employers.  If it remains good law (not reversed on appeal by the California Supreme Court) it gives employers who win on an “independent contractor” issue before the EDD some comfort the Labor Commissioner will be bound to that ruling, and vice versa.
2. This case involved just two California state agencies, the California EDD and the California Labor Commissioner.  But these are the top two California state agencies where misclassification of independent contractors can sting employers the most.  Thus, this is an important win for employers.  Even so, don’t get too excited just yet.  There are many other state agencies and federal agencies where the rule in Happy Nails & Spa may not apply.  So exercise caution.
3. The state and federal government agencies are cracking down on independent contractor status.  The Happy Nails & Spa case illustrates this and demonstrates how dicey independent contractor usage is.  Happy Nails had to fight two state agencies to “win.”  Even when it “won,” it took them years and cost them big bucks.  Thus, we still recommend you think twice and properly analyze independent contractor status of workers before using them.  For more on the legal rules for independent contractor status see our free report: Independent Contractors In The Information Age.