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Every successful entrepreneur understands that true success and growth of a business requires delegation and the collective effort of many people. Leveraging human capital has historically created exponential wealth for business owners, while giving others gainful employment. In today's uncertain economy, however, there are many economic advantages in retaining the services of independent contractors, rather than employees.

Although most business owners understand that there is a fundamental difference between independent contractors and employees, they are probably unaware about how the law categorizes the two.California labor laws tend to implicate an employment relationship unless some clear guidelines are followed in conforming to the independent contractor status. This litmus test is based on objective considerations regarding the putative employer's right to control the individual, regardless of whether control is actually exercised, or how the employer subjectively classifies the individual (contractually or otherwise). Since the case law regarding this issue involves a sliding scale, there is no definitive black and white answer as to whether someone falls within the category of independent contractor or employee. Here are some (but not all) factors that business owners should consider that tend to lead towards an implication of an employer-employee relationship:

1. The business owner needs to train the individual to perform the services.
2. The individual uses the materials, equipment and tools of the business owner to perform the services.
3. The business owner controls when, where and the manner in which the individual is required to perform the services, with little or no discretion for the individual.
4. The individual is prevented from doing work for other clients, or is on a long term commitment that prevents him/her from attaining any other substantial business from third parties.
5. The individual is paid on an hourly basis, as opposed to on a fixed fee project basis.
6. The individual is prevented from hiring third parties or delegate pieces of the project to other parties.
7. The individual does not have an investment in the facilities where work is performed.

Some of the recent case law regarding this issue falls under the Second CircuitÍs decision in Vizcaino v. Microsoft Corp., 120 F.3d.1006 (9th Cir. 1997), whereby the court held that a common law employee relationship was found despite the classification of these individuals as "independent contractors" by Microsoft. As a consequence, Microsoft was required to provide this rather large class of individuals with 401(k) employee benefits normally reserved for full time employees.

Consequently, business owners must carefully consider the nuances of how they operate their relationships with independent contractors in order to avoid an implication of employment. Otherwise, one may find oneself exposed with respect to workers compensation claims, employee benefits, federal withholding taxes, vicarious liability, overtime wages, and immigration requirements, to name a few.æAlso, in the current marketplace with Professional Employer Organizations ("PEO") whom market themselves as the "employers," findings of joint employer status have become more prevalent. With the proper guidance, operating structure, and contractual language, however, business owners may be able to mitigate some of these issues.

David Michail is a business, corporate, entertainment and commercial transactions attorney for the Law Offices of David F. Michail, a Professional Corporation. This article is intended for informational purposes only, and shall not be construed as rendering legal advice. For further information on this issue, or to schedule Mr. Michail for public speaking engagements related to this or other business or entertainment law topics, please call 310-559-4333 or email Mr. Michail at david.michail@michaillaw.com.