Fillable EMPLOYMENT DETERMINATION GUIDE (California)

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EMPLOYMENT DETERMINATION GUIDE (California)

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DE 38 Rev. 4 (1-16) (INTERNET) Page 1 of 7 CU
EMPLOYMENT DETERMINATION GUIDE
Purpose:
This worksheet is to be used by the proprietor of a business to determine whether a worker is
most likely an employee or an independent contractor.
General Information:
Generally, whether a worker is an employee or an independent contractor can be determined
through the application of the factors contained in common law or employment and statutory
provisions of the California Unemployment Insurance Code.
If a worker is an employee under common law, the business that employs the worker must report
the worker's earnings to the Employment Development Department (EDD) and must pay
employment taxes on those wages. If the worker is an independent contractor and the business
pays the worker $600 or more in payments, the business must file a Form 1099-MISC with the
Internal Revenue Service (IRS). The business must also file a Report of Independent Contractor(s)
(DE 542) with the EDD within 20 days of either making payments totaling $600 or more, or
entering into a contract for $600 or more with an independent contractor in any calendar year.
For more detailed information regarding your independent contractor reporting requirements,
view the latest revision of the California Employer’s Guide (DE 44) available on the EDD website
at www.edd.ca.gov/Payroll_Taxes/Forms_and_Publications.htm.
The basic test for determining whether a worker is an independent contractor or an employee is
whether the principal has the right to control the manner and means by which the work is
performed. When the principal has the "right of control," the worker will be an employee even if
the principal never actually exercises the control. If the principal does not have the right of
control, the worker will generally be an independent contractor.
If, on the face of the relationship, it is not clear whether the principal has the "right of control,"
there are secondary factors that are considered to determine the existence or nonexistence of
the right of control.
The enclosed worksheet addresses the basic test and secondary factors through a series of
questions. If use of the worksheet clearly demonstrates that a worker is an employee, you should
contact the EDD and arrange to report the worker and pay the relevant taxes. You may also want
to contact the IRS and your workers' compensation insurance carrier to ensure that you are in
compliance with federal tax laws and with state workers' compensation statutes.
If after completing the worksheet you are not sure whether the worker is an independent
contractor or employee, you may request a written ruling by completing a Determination of
Employment Work Status (DE 1870) or contact the Taxpayer Assistance Center for advice by
calling 888-745-3886. The DE 1870 is designed to analyze a working relationship in detail and
serves as the basis for a written determination from the EDD on employment status.
DE 38 Rev. 4 (1-16) (INTERNET) Page 2 of 7
WORKSHEET ON EMPLOYMENT STATUS
Questions 1 – 3 are significant questions. If the answer to any of them is "Yes," it is a strong
indication that the worker is an employee.
1. Do you instruct or supervise the person while he or she is
working?
Independent contractors are free to do jobs in their own
way, using specific methods they choose. A person or firm
engages an independent contractor for the job's end result.
When a worker is required to follow company procedure
manuals and/or is given specific instructions on how to
perform the work, the worker is normally an employee.
Yes _____
No _____
2. Can the worker quit or be discharged (fired) at any time?
If you have the right to fire the worker at will and without
cause, it indicates that you have the right to control the
worker.
Independent contractors are engaged to do specific jobs
and cannot be fired before the job is complete unless they
violate the terms of the contract. They are not free to quit
and walk away until the job is complete. For example, if a
shoe store owner hires a licensed painter to paint the store,
and the work had started, the store owner would not be
able to just terminate the painter without there being a
good reason or just cause for doing so.
Yes _____
No _____
3. Is the work being performed part of your regular
business?
Work which is a necessary part of the regular trade or
business is normally done by employees. For example, a
sales clerk is selling shoes in a shoe store. A shoe store
owner could not operate without sales clerks to sell shoes.
On the other hand, a plumber engaged to fix the pipes in
the bathroom of the store is performing a service on a one-
time or occasional basis that is not an essential part of the
purpose of the business enterprise. A certified public
accountant engaged to prepare tax returns and financial
statements for the business would also be an example of an
independent contractor.
Yes _____
No _____
DE 38 Rev. 4 (1-16) (INTERNET) Page 3 of 7
A "No" answer to questions 4 – 6 indicates that the individual is not in a business for himself or
herself and would, therefore, normally be an employee.
4. Does the worker have a separately established business?
When individuals hold themselves out to the general public
as available to perform services similar to those performed
for you, it is evidence that the individuals are operating
separately established businesses and would normally be
independent contractors. Independent contractors are free
to hire employees and assign the work to others in any way
they choose. Independent contractors have the authority to
fire their employees without your knowledge or consent.
Independent contractors can normally advertise their
services in newspapers and/or publications, the Internet,
yellow page listings, radio, television, and/or seek new
customers through the use of business cards.
Yes _____
No _____
5. Is the worker free to make business decisions which
affect his or her ability to profit from the work?
An individual is normally an independent contractor when
he or she is free to make business decisions which impact his
or her ability to profit or suffer a loss. This involves real
economic risk, not just the risk of not getting paid. These
decisions would normally involve the acquisition, use,
and/or disposition of equipment, facilities, and stock in trade
which are under his or her control. Further examples of the
ability to make economic business decisions include the
amount and type of advertising for the business, the priority
in which assignments are worked, and selection of the types
and amounts of insurance coverage for the business.
Yes _____
No _____
6. Does the individual have a substantial investment in their
job which would subject him or her to a financial risk of
loss?
Independent contractors furnish the tools, equipment, and
supplies needed to perform the work. Independent
contractors normally have an investment in the items
needed to complete their tasks. To the extent necessary for
the specific type of business, independent contractors
provide their own business facility.
Yes _____
No _____
DE 38 Rev. 4 (1-16) (INTERNET) Page 4 of 7
Questions 7 – 13 are additional factors that should be considered. A "Yes" answer to any of the
questions is an indication the worker may be an employee, but no one factor by itself is deciding.
When those factors are considered, a determination of whether an individual is an employee will
depend upon a grouping of factors that are significant in relationship to the service being
performed. However, the greater the number of "Yes" answers to questions 7 – 13, the greater the
likelihood the worker is performing services as an employee.
7. Do you have employees who do the same type of work?
If the work being done is basically the same as work that is
normally done by your employees, it indicates that the
worker is an employee. This applies even if the work is being
done on a one-time basis. For instance, to handle an extra
workload or replace an employee who is on vacation, a
worker is hired to fill in on a temporary basis. This worker is
a temporary employee, not an independent contractor.
(Note: If you contract with a temporary agency to provide
you with a worker, the worker is normally an employee but
may be an employee of the temporary agency. You may refer
to the EDD Information Sheet: Temporary Services and
Employee Leasing Industries [DE 231F
] on the subject of
temporary service and leasing employers.)
Yes _____
No _____
8. Do you furnish the tools, equipment, or supplies used to
perform the work?
Independent contractors furnish the tools, equipment, and
supplies needed to perform the work. Independent
contractors normally have an investment in the items
needed to complete their tasks.
Yes _____
No _____
9. Is the work considered unskilled or semi-skilled labor?
The courts and the California Unemployment Insurance
Appeals Board have held that workers who are considered
unskilled or semi-skilled are the type of workers the law is
meant to protect and are generally employees.
Yes _____
No _____
DE 38 Rev. 4 (1-16) (INTERNET) Page 5 of 7
10. Do you provide training for the worker?
In skilled or semi-skilled work, independent contractors
usually do not need training. If training is required to do the
task, it is an indication that the worker is an employee.
Yes _____
No _____
11. Is the worker paid a fixed salary, an hourly wage, or based
on a piece rate basis?
Independent contractors agree to do a job and bill for the
service performed. Typically, payments to independent
contractors for labor or services are made upon the
completion of the project or completion of the
performance of specific portions of the project.
Yes _____
No _____
12. Did the worker previously perform the same or similar
services for you as an employee?
If the worker previously performed the same or similar
services for you as an employee, it is an indication that the
individual is still an employee.
Yes _____
No _____
13. Does the worker believe that he or she is an employee?
Although belief of the parties is not controlling, intent of the
parties is a factor to consider when making an employment
or independent contractor determination. When both the
worker and principal believe the worker is an independent
contractor, an argument exists to support an independent
contractor relationship between the parties.
Yes _____
No _____
DE 38 Rev. 4 (1-16) (INTERNET) Page 6 of 7
Interpretations of Answers
Depending on the services being performed and the type of occupation, this questionnaire may
produce a variety of results. There may be some factors which lean toward employment and
some which lean toward independence. The answers to questions 1 – 6 provide a strong
indication of the presence or absence of right to control. The answers to questions 7 – 13 when
joined with other evidence may carry greater weight when indicating the presence or absence
of direction and control.
1. If all of the answers to questions 1 – 3 are "No" and all of the answers to questions 4 – 6 are
"Yes," there is an indication of independence. When this is the case, there are likely to be a
number of "No" answers to questions 7 – 13 which add to the support of the determination.
2. If all of the answers to questions 1 – 3 are "Yes" and all of the answers to questions 4 – 6 are
"No," it is very strong indication that the worker in question is an employee. When this is
the case, there are likely to be a number of "Yes" answers to questions 7 – 13 which add to
the support of the determination.
3. If the answer to question 1 or 2 is "Yes" or the answer to any one of questions 4 – 6 is "No,"
there is a likelihood of employment. At the very least, this pattern of answers makes the
determination more difficult since the responses to questions 7 – 13 will probably be
mixed. In such situations, the business owner would be well advised to complete a
DE 1870, giving all of the facts of the working relationship and requesting a ruling from
the EDD.
4. If the answer to question 3 is "Yes" and the answer to question 4 is "No," there is a
likelihood of employment. Given this pattern of answers, it is probable that the answers to
questions 5 and 6 will also be "No." When this happens you may also see more "Yes"
answers to the last group of questions (7 – 13). This scenario would support an employment
determination.
These four scenarios illustrate only a few combinations of answers that could result from the use
of this Employment Determination Guide, depending on the working relationship a principal
may have with a worker and the type of occupation. The more the pattern of answers vary from
the above four situations, the more difficult it is to interpret them. In situations 1 and 2, there is
a greater chance that the interpretation will be accurate, and they present the least risk to the
business owner of misclassifying the worker. With other combinations of answers, the EDD
recommends that business owners complete a DE 1870, giving a complete description of the
working relationship and requesting a ruling from the EDD.
NOTE: Some agent or commission drivers, traveling or city salespeople, homeworkers, artists,
authors, and workers in the construction industry are employees by law even if they
would otherwise be considered independent contractors under common law. If you are
dealing with workers in any of these fields, access Information Sheet: Statutory
Employees (DE 231SE) from the EDD website at
www.edd.ca.gov/Payroll_Taxes/Forms_and_Publications.htm or contact the Taxpayer
Assistance Center at 888-745-3886.
DE 38 Rev. 4 (1-16) (INTERNET) Page 7 of 7
SOME EXAMPLES OF INDEPENDENT CONTRACTORS AND
COMMON LAW EMPLOYEES
Independent Contractors
An attorney or accountant who has his or
her own office, advertises in the yellow
pages of the phone book under "Attorneys"
or "Accountants," bills clients by the hour, is
engaged by the job or paid an annual
retainer, and can hire a substitute to do the
work is an example of an independent
contractor.
An auto mechanic who has a station
license, a resale license, buys the parts
necessary for the repairs, sets his or her own
prices, collects from the customer, sets his
or her own hours and days of work, and
owns or rents the shop from a third party is
an example of an independent contractor.
Dance instructors who select their own
dance routines to teach, locate and rent their
own facilities, provide their own sound
systems, music and clothing, collect fees
from customers, and are free to hire
assistants are examples of independent
contractors.
A repairperson who owns or rents a shop,
advertises the services to the public,
furnishes all of the tools, equipment, and
supplies necessary to make repairs, sets the
price for services, and collects from the
customers is an example of an independent
contractor.
Employees
An attorney or accountant who is employed
by a firm to handle their legal affairs or
financial records, works in an office at the
firm's place of business, attends meetings as
needed, and the firm bills the clients and
pays the attorney or accountant on a regular
basis is an example of an employee.
An auto mechanic working in someone's
shop who is paid a percentage of the work
billed to the customer, where the owner of
the shop sets the prices, hours, and days the
shop is open, schedules the work, and
collects from the customers is an example of
an employee.
Dance instructors working in a health club
where the club sets hours of work, the
routines to be taught and pays the
instructors from fees collected by the club
are examples of employees.
A repairperson working in a shop where the
owner sets the prices, the hours and days
the shop is open, and the repairperson is
paid a percentage of the work done is an
example of an employee.
NOTE: Payroll tax audits conducted by the EDD have disclosed misclassified workers in
virtually every type and size of business. However, certain industries seem more prone
to have a higher number of misclassified workers than others. Historically, industries at
higher risk of having misclassified workers include businesses that use:
• Construction workers
• Seasonal workers
• Short-term or "casual" workers
• Outside salespersons
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Completed 16 May 2022

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