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socrateaser
socrateaser, Lawyer
Category: California Employment Law
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Experience:  Retired (mostly)
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Are there any laws or regulations that prohibit a long-term

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Are there any laws or regulations that prohibit a long-term consultant sitting on the senior management board and participating in daily operational activities from supervising, hiring and firing employees for his client?

The contractor fits the legal understanding of 'independent contractor' according to California and IRS guidelines.
Hello,

The short answer to your question is, "no." There is no prohibiting law.

The U.S. Supreme Court has approved a six-factor test to determine whether or not a corporate director is an independent contractor or employee (Clackamas Gastroenterology Associates, PC v. Wells, 538 US 440, 449-450):

  • Whether the organization can hire or fire the individual or set the rules and regulations of the individual's work [450]
  • Whether and, if so, to what extent the organization supervises the individual's work
  • Whether the individual reports to someone higher in the organization
  • Whether and, if so, to what extent the individual is able to influence the organization
  • Whether the parties intended that the individual be an employee, as expressed in written agreements or contracts
  • Whether the individual shares in the profits, losses, and liabilities of the organization.

 

The factors described above were originated as part of a determination of corporate liability for purposes of unlawful employment discrimination. The point, however, is important because the Clackamas case shows that there is no law prohibiting an independent contractor from sitting on a corporation board. The issue is simply whether or not the contractor is in fact an independent contractor, rather than an employee.

 

Please let me know if my answer is helpful. And, thanks for using justanswer.com!

Customer: replied 3 years ago.


Thank you. That absolutely clarifies the first part regarding sitting on the Executive Board (Senior Management Committee), which might imply the answer to the second part, but I would like explicit confirmation regarding the "supervising, hiring and firing" of employees.


 


The situation is that an IT consultant was brought in to a company that had no internal IT resources. The consultant was eventually offered a position on the Executive Board. The consultant eventually over saw the hiring of IT employees for his client. This expanded into a position where the IT consultant actually supervising the employees that worked for the client, not the consultant.


 


The question has arisen as to whether the consultant or the client is at risk of violating labor laws.


 


It seems like your answer would suggest that they are not, but I would just like to see the answer stated in concrete terms.


 


Thank you for your time.

The consultant is not personally violating any labor law. However, the corporation may be violating the Labor Code and the Unemp. Ins. Code, because if the consultant has the power to hire and fire corporation employees, then the consultant is an employee, not an independent contractor -- and the corporation must pay the consultant wages/salary and withhold payroll tax.

A corporation can act only through its individual employees. Moore v. Phillips (1959) 176 Cal. App.2d 702, 709 [1 Cal. Rptr. 508].

A director, who is not an employee, has no power to direct the day-to-day activities of the corporation. Only an officer/employee has such power. Thus, if the consultant is engaged in hiring and firing, the consultant is either acting as an officer/employee, or the consultant's decisions are merely advisory, and have no legal force or effect, until a corporate officer actually makes the order concerning hiring or firing.

Hope this helps.
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