Law & Legislation

CALIFORNIA LEGISLATURE

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TREATING YOUR SALESPEOPLE AS INDEPENDENT CONTRACTORS? YOU’RE LIKELY ON THIN ICE!

More and more pool contractors seem to be treating their sales people as independent contractors rather than employees. This might seem to be a money saving scheme – no Workers’ Comp premiums, no health insurance or retirement benefits, etc., etc. But the chances that this is legal are slim indeed. And when the IRS and Franchise Tax Board finish collecting back benefits, taxes and fines, you could find yourself living an all too familiar nightmare.

SPEC has asked its Special Counsel Sam Abdulaziz to prepare a legal opinion on this very important issue. We reprint it here as a caution to employers. The following is a general analysis and is not intended to in any way provide you with legal advice specific to any given business. If you have any doubt about your company's individual situation, please consult your own attorney.

LAW OFFICES OF
ABDULAZIZ & GROSSBART
A Partnership of Professional Corporations
Mailing Address: P.O. Box 15458 / North Hollywood , CA 91615-5458 / (818) 760-2000 or (323) 877-5776 / Fax: (818) 760-3908

SAM K. ABDULAZIZ KENNETH S. GROSSBART
A Law Corporation A Law Corporation

The short answer is that for your scenario, wherein a registered salesperson sells a project with very little supervision, the salesperson could probably be deemed an independent contractor.

However, his principal would still most likely be held responsible for the salesperson’s acts.

As you know, the typical short answer to the Independent Contractor/Employee determination is whether one has the right to control the manner and means by which a result is reached. The hirer can always decide what the end result should be. However, whether one is an independent contractor or employee will be determined on how much control one has to reach that end result.

There are several sources, including statutes, regulations etc. that deal with the determination of the employer/employee relationship.

Typically, the purpose of the particular statute is usually determinative of whether one is in fact an independent contractor or an employee. Unfortunately, the courts are not that consistent. There are also different treatments for differing reasons — one common example comes to mind:

If an unlicensed roofer falls off the roof, the roofer will be found to be an employee for Workers’ Compensation purposes. The reason for that is that Workers’ Compensation is intended to protect workers. Further, there is some sympathy for the worker versus the Workers’ Compensation Fund. However, if that same roofer tries to record a Mechanic’s Lien, then the roofer will probably not be able to collect because he was unlicensed. We would suspect that the same consumer protection type analysis would hold true with respect to salespeople, and in the construction industry, registered salespeople (which may be argued to be the same as licensing for your purposes)

The Employment Development Department (EDD) is usually the first place to turn. The EDD makes determinations for purposes of State employment tax. . In that regard, the EDD has provided the following common law test for employment:

Does the principal or the worker have the right to control the manner and means by which the work is done?

If one or more of the following conditions exist, there may be an employment relationship:

• The principal has the right to discharge the worker at will and without cause

• Whether the type of work (sales) is usually done under the direct supervision rather than by a specialist without supervision

• The work is not separate from the regular work, business, or services provided by the principal

• There is no written contract showing the intent of the parties to create an independent relationship; and

• The nature of the work is such that the worker has little or no meaningful discretion over how to do the job

The EDD lists these situations, based upon factors articulated by the State Supreme Court and based upon regulations of the EDD implementing those factors. The Regulations may be found in Title 22, California Code of Regulations, Section 4304-1.

The California Unemployment Insurance Appeals Board (CUJAB) held the following circumstances were indications of employment;

• The salespersons’ services were a direct and essential part of the business operation.

However, where the salespersons paid their own expenses, established their own hours of work and itineraries of travel, were not required to attend sales meetings or make reports, and received direction from the principal consisting only of establishing selling prices, terms and conditions of the sale, approval of credit, and furnishing samples, literature, or order blanks, the salespersons were determined to be independent contractors.

We also examined the exemptions available to other types of salespersons. Direct salespersons who might be employees under common law rules are excluded by statute from Unemployment Insurance rules if all of the following conditions are met:

• The salesperson is licensed under specific provisions of the Business and Professions Code or the Harbors and Navigation Code or is engaged in the business of primarily in-person demonstration and sales of consumer products (including services or other intangibles) in the home or sales to any buyer for resale in the home or otherwise than from a retail or wholesale establishment.

• Substantially all of the remuneration for the services is directly related to sales rather than to the number of hours worked.

• The services are performed under a written contract expressly providing that the individual will not be treated as an employee for state tax purposes.

The foregoing exception is stated to apply to real estate, mineral, yacht, oil and gas, or cemetery brokers, or real estate, cemetery, yacht, or direct salespersons. We have found no determination whether a Contractors’ Board salesperson’s registration is the same as one of the licensed salespersons excluded by the foregoing law. It is likely that the registration is not the same as a license, as other than being free of criminal convictions, there are no tests, bonding requirements, or other prerequisites to registration.

Because registration alone does not answer the inquiry, we have looked at other sources. Where it is not clear whether the principal (proprietor) has the right of control, the actual working relationship between principal and worker must be examined. The following are examples of ways to avoid a person being classified as an employee:

• Always use a written agreement with an independent contractor which describes the services to be performed, the compensation to be paid, and that the relationship is as an independent contractor with the contractor responsible for its own taxes, insurance, etc.;

• Pay the independent contractor on a project by project basis rather than by the hour;

• Do not provide an employee handbook or other documents typically provided to employees;

• Do not instruct the contractor on the manner of his or her performance of its service. This does not mean that you cannot establish company guidelines as to the manner that the company conducts a project or its business;

• Do not provide tools or other supplies or equipment to the contractor — it may be a good idea to sell the contractor any samples;

• Do not impose conditions on the contractor concerning work hours, or work days;

• Never provide any employee type benefits, such as health insurance, vacation or sick days, pension or expense reimbursement;

The following is an example of salespersons who were determined to be independent contractors by the CUIAB; again, the issue was the manner of control regarding the manner and means of selling the principal’s merchandise:

“The salespersons maintained their own offices and showrooms and paid their own expenses. They belonged to salespersons’ organizations which promoted sales shows several times a year. All expenses in displaying and selling the petitioner’s merchandise at these shows were borne by the salespersons. However, one of the salespersons occasionally used the principal’s showroom and the principal’s office facilities were available to him.”

We give you the above information as background so you can discuss this matter yourself. We do not believe that the salespersons’ registration gives salespersons the blanket exemption stated above that applies to persons such as real estate salespersons. Indeed, we believe all real estate salespersons are independent contractors, but some registered salespersons are employees. In examining and adding the registered salesperson’s registration into the mix, keep in mind that we are informed by the Contractors’ Board that one can be registered to a number of entities and not just one entity. Where a salesperson is acting on behalf of multiple principals it bodes better for the independent contractor determination

All claims have an outside time limit. That is typically called a statute of limitations. That means that if one does not file suit within the appropriate period of time, then that person loses his or her right to file suit. In construction, typically, one has either three and/or four years to file suit, depending on the theory of the case. However, because some defects in construction may not be visible, such as being behind a wall, there may be a longer time limit. That longer time limit is ten years. This is called the statute of limitations for filing suit on latent defects. Latent defects are generally defined as those that are not discoverable by normal inspection.

In Lantzy v. Centex Homes, Lantzy sued Centex Homes alleging latent defects in construction. The case had other matters dealing with class action, etc. However, that is not relevant to this article’s discussion. We will assume that Lantzy sued on behalf of him or herself only. Lantzy claimed that there was a flaw in the design and manufacturing of the homes built by Centex. Although these defects were not discovered within three years, the lawsuit was not filed for more than ten years after substantial completion. As problems were discovered, Centex represented to Lantzy that it would correct them. At various times, Centex attempted to make repairs but problems in the construction remained.

In that all parties admitted that the lawsuit was filed more than ten years after substantial completion, the trial court ruled that the lawsuit must be dismissed as it was filed beyond the applicable statute of limitations. The case was appealed and the Court of Appeal reversed the decision of the trial court. There were two theories that were discussed by the court. Both of them were equitable in nature. Equity means that things should be fair.

One of the theories was called “equitable tolling.” This is a judge made rule and it extends the statute of limitations to insure “fundamental practicality and fairness.” Courts would apply this theory to keep one from losing the case on a mere technicality where there would be no prejudice to the other side by ruling that the limitations period should be extended for the tolling period. The California Supreme Court did not agree. They California Supreme Court stated that equitable tolling should apply when it would not be inconsistent with the text of the statute that established the limitation period.

With respect to latent construction defects, the purpose of the lengthy ten-year period is to give property owners a liberal time for bringing suit while still protecting contractors and construction trades-people from perpetual exposure to liability for their work. Equitable tolling for repairs would be inconsistent to the statute. The court also stated that it is unnecessary for fundamental fairness. Ten years is a long enough time for a plaintiff to discover defects and sue. Even if the defendant makes promises to repair and fails to do so, the exceptionally long period of time should be sufficient for plaintiffs to go to court if necessary. Equitable tolling is more appropriate when the limitations period is especially short.

Although equitable tolling would not work in this context, the Supreme Court stated that another theory called “equitable estoppel,” under some circumstances, could work to prevent a defendant from relying on the ten-year statute of limitations. Equitable estoppel deals with circumstances in which a party will be prevented from using the statute of limitations as a defense because his own conduct induced another into waiting before bringing suit. Equitable estoppel is used to prevent one from benefiting from his own injustice. For example, a builder who pretends to make repairs simply to “buy time” until the statute of limitations runs will be estopped in court from asserting that defense.

The court found in this case at bar, however, that there was insufficient evidence that the defendants had induced the plaintiff to forebear in bringing suit, so equitable estoppel was not appropriate on these facts either.

Suspects Caught in an Undercover Sting

SACRAMENTO – At an undercover sting held in Sacramento recently, the Contractors State License Board (CSLB) cited suspects, who call themselves “consultants” but act as unlicensed swimming pool contractors. The sting was held to send a message that swimming pool contracting requires a license and that consumers need to be aware of the risks they take when hiring such illegal consultants.

Action was taken against 13 suspects. Six will be required to appear in Municipal Court to answer to misdemeanor charges for contracting without a license; they could face a maximum of six months in jail and/or $1,000 fine for a first offense. During the sting, the Roseville Police Department arrested one suspect on unrelated outstanding warrants. Seven others were issued administrative citations.

The CSLB has seen an increase in the number of businesses that offer their services as “swimming pool consultants.” These unlicensed consultants convince homeowners to act as their own general contractor – or what is known as an owner-builder. They claim that homeowners can save substantially on their swimming pool project by doing so. The consultant contracts to direct and control the project, promising to select and supervise workers and inspect the project as it progresses. What they don’t say is that the homeowner assumes all of the risk, responsibility and liability for the workers and the job they do – and often end up paying as much or more for the project.

It is not illegal for a homeowner to act as an owner-builder, but the CSLB recommends that unless the homeowner is very experienced in construction, it is best to hire a legitimate, licensed expert.

To qualify as an owner-builder, the homeowner must take on the responsibility of an employer, including providing workers’ compensation insurance and withholding taxes. If a subcontractor is hurt on the job, the homeowner could be asked to pay for injuries and rehabilitation through their own homeowner’s insurance policy.

If the job is done improperly, or if any of the construction doesn’t pass building inspections, the homeowner is responsible for correcting the work.

Here’s how the sting worked: CSLB investigators posing as homeowners invited suspected illegal swimming pool consultants to an undercover sting house to offer their services. The suspects were targeted from leads provided by the Swimming Pool Education Council and from consumer complaints. If they offered to work in the capacity of a contractor and the fee was $500 or more and they did not have a contractor’s license, they were issued an NTA or cited.

“It’s our duty to protect consumers throughout the state and maintain integrity within the building industry,” said Department of Consumer Affairs Director Charlene Zettel.

By law, anyone who contracts for or bids on a construction project valued at $500 or more (total labor and materials) must be licensed by the CSLB. These swimming pool consultants were found to be acting in the capacity of a contractor. To qualify for a license, a contractor must pass a trade and license law examination, verify four years of journey-level experience in the trade, and post a license bond. Unlicensed contractors can advertise only if they state in their ad that they are unlicensed and bid on work valued at less than $500.

The CSLB urges consumers to follow these tips when dealing with a building contractor:

· Be wary of contractors who try to convince you to act as an owner/builder on the project

· Verify the contractor’s license by going online at www.cslb.ca.gov or calling toll-free at (800)321-CSLB

· Do not pay more than 2 percent or $200, whichever is less, as a down payment on swimming pool construction

The Contractors State License Board operates under the umbrella of the California Department of Consumer Affairs. The CSLB licenses and regulates California’s 278,000 contractors, and investigates 25,000 complaints against contractors annually.