Independent Contractor VS Employee: How much control is too much control?

A common and repeated inquiry from our clients involves whether, when and how to classify workers as independent contractors vs employees. The question is especially interesting to companies in many industries that utilize a network of sales professionals. Many of these businesses are highly regulated adding pressure on the company to ensure that their sales staffs transact business sales lawfully. A critical inquiry in these situations involves analyzing the degree of control the company exercises over its independent contractor personnel. Another important factor arises when the company sets minimum sales goals or quotas. The critical classification question is always “how much control is too much control to maintain independent contractor status?”

A recent case that addressed these questions in the insurance industry may provide guidance for other businesses that wish to use independent contractor sales force. In Beaumont-Jacques v. Farmers Group, Inc., 2013 Cal. App. LEXIS 546 (Cal. App. 2d Dist. June 12, 2013), a District Manager claimed she was misclassified as an independent contractor because Farmers controlled the “manner and means” by which she achieved required sales results. The court disagreed, finding that this manager was properly classified as an independent contractor. In its decision, the court referred to a California Supreme Court case, McDonald v. Shell Oil Co. (1955) 44 Cal.2d 785, which held that “the owner may retain a broad general power of supervision and control as to the results of the work so as to insure satisfactory performance of the independent contractor . . .” Specifically, a company can retain the right to inspect, the right to make suggestions or recommendations as to details of the work, and the right to prescribe alterations or deviations in the work and still maintain an independent contractor classification.

Some reasons the Court relied on in finding the manager as an independent contractor, include: she exercised discretion by training and motivating other agents; she set her own daily working hours and vacation days; she usually set the time for her arrival and departure at her office; she set lunch and break times; she hired and supervised her office staff; she paid her own expenses, (e.g. marketing, office rent, office supplies and telephone service) and she deducted those expenses on her personal tax returns by filing a Schedule C; she listed herself as self-employed on her tax returns; she had signed an agreement with Farmers that established an independent contractor relationship and expressed that she was not an employee. The court rejected the manager’s argument that the “at-will” nature of her employment supported for her claim of employee status because she voluntarily resigned (therefore Farmers had not asserted or relied on the at-will clause); and, the right to terminate the agreement was given to both the manager and the company. Of interest, the court noted that even though Farmers had input about the quality and direction of the manager’s efforts, Farmers did not have control over the details of how the manager performed those efforts. While classification cases are always dependent on the specific facts of each case, the court found a sufficient level of freedom and autonomy in the manager’s conduct of the daily details of her activity such that she was properly classified by the company as an independent contractor, not an employee.

Proper classification of independent contractors is important for any business because misclassification can result in claims for unpaid overtime, wrongful termination, unemployment benefits, and subject a hiring company to other state and federal employment law claims. Misclassified plaintiffs will frequently claim various benefits and protections made available to employees under the California Labor Code and Federal labor statutes. The potential penalties for misclassification can be costly and severe. Hiring companies must take special care to avoid the assertion of too great a level of control over the day-to-day tasks and performance of their independent contractors.

Roundup Ready Prevails in Court

In a recent US Supreme Court Case, Bowman v Monsanto, the giant agribusiness Monsanto, sued an Indiana farmer for unlawful use of its patented soybean. Monsanto is the producer of the well known pesticide Roundup. It has also manufactured a genetically altered soybean known as Roundup Ready. The company has a patent on the new soybean granting it the exclusive right to produce Roundup Ready for 20 years. Monsanto sells its seeds to farmers, granting them a one year license to plant and harvest their seeds as produce and does not allow for the seeds from the harvest to be planted or sold.

Although Farmer Vernon Bowman’s license to plant Monsanto beans had expired, he continued to do so using beans he had purchased from neighboring farmers, very well knowing that the beans he purchased contained the patented genetics produced by Monsanto. Bowman’s intentions were to replicate the beans for market sale and thus his actions came into direct violation with Monsanto’s 20 year patent.

While Bowman argued Monsanto’s case void due to the exhaustion doctrine, also known as the first sale doctrine, the court ruled in favor of Monsanto. The exhaustion doctrine limits patent holder’s rights over products to the first legal sale of their patented product. This doctrine however, applies only to individual patented products. For example, if HP sells a computer to a purchaser and the purchaser then sells the same computer to a friend, the purchaser is protected under the exhaustion doctrine. Although, were the HP computer able to duplicate itself, the purchaser would not legally be able to sell the copies of the HP computer. Being that the soybean is replicated through nature it does not fall under the exhaustion doctrine. Thus, Bowman’s argument did not stand before the US Justices.

The court demonstrated its desire to protect intellectual property as a means of protecting incentive and thus keeping investment and technological improvements in progression. Bowman v Monsanto is 1 out of 11 cases Monsanto has won over Roundup Ready. Such cases demonstrate the value and level of seriousness the justice system applies to patented products.

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