COLUMN ONE : Hired Guns Boom in Workplace : A growing number of one-time employees have become independent contractors, lacking benefits and protections. The arrangement opens the door to abuse.

Wendy Breen says she naively expected an apology from her boss at a Buffalo, N.Y., real estate firm after he allegedly tried to rape her during an office party. Instead, she says, he fired her two days later.

So Breen went to a federal agency for help, and authorities eventually concluded that she, in fact, was fired after being “subjected to continual sexual harassment.” But the agency said it couldn’t do anything for her anyway. And the reason it gave illustrates a big--and frequently exploited--gap in the legal and economic safety net for millions of working Americans.

The agency determined that Breen, as a real estate agent, was not actually an employee but an increasingly common breed of worker known as an independent contractor. As such, she wasn’t protected against sexual harassment or other types of on-the-job discrimination under federal civil rights law.

Independent contractors--whose diverse ranks include many consultants, free-lancers, handymen, hairstylists, newspaper deliverers, doctors and others who work, at least in theory, for themselves--are also left out in the cold when it comes to other traditional benefits of employment.

The issue is critical to the droves of people who lost their jobs in the wave of corporate retrenchments over the last decade and who then turned to self-employment to make ends meet. The boom in independent contracting has also contributed to the underground economy by helping some workers and employers cover up their schemes to avoid payroll taxes.

Like part-time and temporary workers, independent contractors frequently have little or no job security, health insurance, paid sick leave or paid vacation time.

And in other ways they are even worse off. When they get hurt on the job and miss time from work, there usually is no workers’ compensation to cover the lost pay and medical bills. If they get fired, they aren’t entitled to unemployment benefits.

“We have no union, no grievance committee, no labor law to protect us. We’re independent . . . and management is very much aware that we don’t have rights,” said Breen, who nevertheless has taken her case to federal court.

“In many different ways, employers are trying to see if they can create independent-contractor relationships,” said Michelle Yu Kim, an employment lawyer with the Legal Aid Foundation of Los Angeles. “They need workers, but they don’t want an employer’s responsibilities or obligations.”

One problem is that the legal definition of an independent contractor is fuzzy in many circumstances. Different government agencies apply a confusing array of different standards to determine who qualifies.

Amid the ambiguity, controversies have erupted over whether truck drivers and even topless dancers can be considered independent contractors and thus denied employee benefits.

But most experts say the key test is who controls the “manner and means” of a person’s work.

When workers control when, where, how and with whom they work, they probably are independent contractors. If an employer makes those decisions, then the workers probably are employees.

(The term independent contractor is also used in other contexts for independent corporations that enter into contracts with other businesses.)

Some See Benefits

In any case, not everyone is hurt by the rise in independent contractors, whose numbers have been conservatively estimated at 5 million by the U.S. Small Business Administration. Some workers--including many moonlighters and parents who don’t want full-time jobs--love the freedom of self-employment and thrive as independent contractors.

Terry Gooch Ross of the Silver Lake area of Los Angeles worked for 16 years as a personnel and training specialist at a string of financial services companies before going into business for herself in 1986. “I’m doing what I did before, but I’m doing it in an environment that’s much more rewarding,” she said.

“You can choose who you want to work for,” said Ross, 44, who now normally consults for nonprofit family and child services agencies. “I can ski during the week and work on weekends, when everyone else is waiting in the lift lines.”

Candace Greene, a solo public relations practitioner in Los Angeles, said she valued the regular paychecks, health insurance benefits and recognition she received while working for large organizations for 10 years. But she said she prefers the flexibility and variety in her life as an independent contractor serving an array of clients in different businesses.

“I don’t worry about losing my job like so many people do,” Greene said. “If one project ends, another begins.”

Employers, for their part, maintain that they gain competitive advantages from using independent contractors who can be hired and fired freely and who receive no benefits. Consequently, firms often say they can afford to pay independent contractors more than regular employees.

Yet many of those forced into independent contracting make too little money or are too unsophisticated to fend for themselves. Some little-educated Los Angeles janitors, for instance, are hired as independent contractors and are required to buy their own supplies and pay fees to firms that line up their cleaning jobs.

In addition, the Internal Revenue Service estimates that 3 million employees are wrongly classified as independent contractors. Workers themselves often ask to be treated as independent contractors rather than employees in order to take extra tax deductions--or escape payroll taxes altogether by being paid in cash under the table.

“It’s not always the big, bad employer who is cheating an employee. In some cases, it’s the worker cheating on his own,” said a Washington lawyer who has studied the issue but asked not to be identified.

Abuses Continue

But authorities say people such as construction workers and auto mechanics are often misclassified by bosses who want to foist legal liabilities and business expenses onto their staffers.

In fact, unscrupulous firms have reportedly fired workers and brought them back as independent contractors, even though they returned in roughly the same capacity.

Margarita Contreras found out the hard way about the disadvantages of being an employee misclassified as an independent contractor.

When Contreras worked under the direction of a Beverly Hills firm in the mid-1980s, making costume jewelry at her Pico-Union home, she sometimes didn’t get overtime pay or even the minimum wage. And when Contreras quit, her employer sued for damages, claiming Contreras broke an oral contract and left work unfinished.

Contreras successfully defended herself against the lawsuit, and through a countersuit, she eventually won the back pay she was entitled to as an employee. Still, the case demonstrates “the way that employers attempt to get around all the regulations in an employment relationship . . . by just declaring someone independent,” said Contreras’ lawyer, Anthony Mischel.

The case of K. Kim, a 37-year-old security guard, illustrates other legal and practical issues that come up with misclassified workers. For three years, Kim consistently worked 14-hour days, seven days a week, at a swap meet just west of downtown Los Angeles.

Kim--who asked that he not be identified by his full name--argued in a complaint with the California labor commissioner’s office that he was cheated by the swap meet because he never received overtime pay.

The swap meet owner countered that Kim wasn’t entitled to overtime pay because he was an independent contractor who sold his services to the swap meet and other firms. The owner also noted that Kim signed a document declaring that he was an independent contractor.

But Kim said he was an employee, hired by the owner of the swap meet and given specific instructions on how to handle the job and when to work. The labor commissioner’s office ruled in Kim’s favor in 1991, finding that the swap meet owner “had complete control on how the job was done.”

As a result, the swap meet was ordered to pay $12,256 in back wages and penalties, most of which Kim is still trying to collect through court battles.

Battle Over Overtime

In an interview, Kim said he was misled into signing the independent contractor document. Kim said his employer called him in one night shortly after he landed the security guard job and asked him to sign some “ordinary paperwork.”

“I didn’t know much English or anything about American laws, so I just did what my employer told me to,” said Kim, who emigrated to Los Angeles from South Korea 10 years ago and who was interviewed in Korean.

Later on, though, when Kim kept asking for overtime pay, he said his employer replied: “What are you talking about, you’re an independent contractor. Didn’t you sign that document?”

Eventually Kim was fired, a development he blames on his persistence in raising the overtime issue.

Concerns about independent contractor-related abuses have prompted officials to find ways to tighten the employment law and tax loopholes and to crack down on lawbreakers. According to some federal estimates, the U.S. government loses more than $20 billion annually in income tax revenue due to the misclassification of workers and the underreporting of income by independent contractors and other self-employed people.

Two major bills that stalled in Congress last year are expected to be revised and reintroduced this year. In California, two state agencies last April launched an enforcement program aimed largely at the misclassification of independent contractors and related abuses.

Also, prompted by concerns that the entertainment industry is a huge offender in misclassifying employees as independent contractors, the IRS recently set up a special task force to examine Hollywood’s practices.

In some industries, companies that properly classify their workers as employees and pay their fair share of withholding taxes and workers’ compensation insurance are hammered by competitors who undercut them by dodging those employer obligations.

Los Angeles garment manufacturers, for example, complain of being underbid by competitors who can charge less because they pay no workers’ compensation.

A broader concern raised by economists and management experts is whether independent contracting could, over the long term, undermine the quality of the nation’s work force. Not a lot of employers are likely to invest in job training for workers who may pick up and leave on a moment’s notice. “As a long-term strategy, it’s a disaster,” said Paul Rupert, a management consultant on work force issues.

But Rupert and other management consultants say there is nothing inherently wrong with having independent contractors. It gives companies a flexible way to expand or cut their staffing as the need arises, without going through all of the hassles of hiring or firing. “It’s only problematic if it’s abused,” Rupert said.

Trouble is, abuse of people classified as independent contractors is commonplace, and it often hurts the poor. In the late 1980s, the plight of 50 migrant workers who harvested cucumbers for a Gilroy, Calif., grower but were not covered by workers’ compensation insurance caught the attention of the California authorities.

Legal Protections

The grower contended that the farm workers were independent contractors and thus not eligible for workers’ compensation because they were not directly supervised in the field and were able to set their own hours. But state officials pressed the grower to provide coverage, took the case to the California Supreme Court, and won a sweeping, precedent-setting decision in 1989.

Mindful of the far-reaching issues raised by the case, the court majority held that allowing growers to avoid buying workers’ compensation also would offer “a disturbing means” for them to skirt wage laws, child-labor restrictions, health and safety regulations and anti-discrimination statutes.

Still, even after that decision, many people in employee-like roles have continued to lose benefits by being labeled as independent contractors.

Perhaps the toughest legal hurdles are faced by people such as Breen, the real estate agent, and others in occupations long connected with independent contractor status.

Breen said she first filed an assault and attempted rape complaint against her former boss, Gary Kenline, but later withdrew it at the insistence of her husband, who has since died. Later on, she filed a sexual harassment case with the U.S. Equal Employment Opportunity Commission, but the agency ruled in 1991 that it couldn’t help her because of Breen’s supposed status as an independent contractor.

Now Breen, 40, is fighting for damages in federal court and awaits a hearing Thursday. She argues that she was treated like an employee and thus should be protected under civil rights and employment law. In fact, government officials say some real estate agents are employees.

Her lawyer, Philip B. Abramowitz, said Breen “put in 40 hours a week there, she attended meetings there. . . . She was not allowed to work for anyone else. If you’re an independent contractor, you’re allowed to contract with various people.”

Moreover, Breen said she feared that Kenline had enough control over her to ruin her new career as a real estate agent. She claims that Kenline, the 1992 president of the Greater Buffalo Assn. of Realtors, threatened more than once to make sure she never got another real estate job in New York state if she filed a formal complaint against him or his firm. The lawyer for her former boss’s real estate firm issued a blanket denial of Breen’s allegations but declined to answer specific questions.

Court Fight

As for whether sexual harassment actually occurred, Breen appears to be supported by substantial evidence. The EEOC itself found that her former boss was guilty of “unwelcome conduct” including “several requests to accompany him to a motel” and “physical advances” that interfered with her ability to do the job.

Yet today Breen faces a tough court fight, and she said she is baffled by the reason for the legal distinction between employees and independent contractors.

“I’m a person,” she said. “I should have human rights; I should have civil rights. I don’t see why there should be a difference.”

“This has to change,” she said.

Times staff writer Don Lee contributed to this story.

Are You an Independent Contractor?

It’s often fuzzy whether a worker is an independent contractor or an employee. But the more often you answer “yes” to the following questions, the more likely it is that you are an independent contractor:

1. Do you--rather than the person or firm that hired you--control how the work is done?

2. Are you protected against being fired at will?

3. Do you have your own business, an enterprise that is distinct from the firm that hired you?

4. Is your work generally unsupervised by the firm that hired you?

5. Is your work highly skilled?

6. Do you provide the equipment needed to do the job?

7. Do you have the right to hire and fire assistants?

8. Were you hired for a short period?

9. Are you paid on a piece rate or by the job, rather than by the amount of time it takes to finish?

10. Are you providing a service that the hiring firm normally does not provide to customers?

11. Have you entered into an oral or written contract indicating that you are an independent contractor?

For more information, call any of the regional offices of the California Division of Labor Standards Enforcement. Also, employers with questions about related tax issues can call their local California Employment Development Department tax office.

Source: California Division of Labor Standards Enforcement

Tax Tips for Independent Contractors

If you are an independent contractor, you must meet several Internal Revenue Service requirements, including:

* Self-employment tax: This is a Social Security levy for self-employed people earning more than $400 a year. While employees share the Social Security tax burden with their employers, independent contractors must pay it themselves. The self-employment tax must be paid quarterly, using IRS Form 1040 ES. At year-end, a Schedule SE form is to be filed with the Form 1040 tax return to reconcile the quarterly payments with the tax liability for the year.

* Quarterly income tax payments: Independent contractors must file quarterly tax payments if they expect their income tax liability for the year to exceed $500. The required tax form is 1040 ES, which also is used for the quarterly self-employment tax.

* Business income and expenses report: At year-end, independent contractors are required to report their business income and expenses by attaching a Schedule C to their tax forms.

AN EMPLOYER’S RESPONSIBILITY

If you operate a trade or business that pays an independent contractor more than $600 a year, there are two basic requirements: issue the independent contractor a 1099 MISC form and report the same information directly to the IRS. But those requirements do not apply to consumers. For instance, a homeowner who uses an independent contractor to fix a roof need not issue a 1099 MISC form.

For more information on tax rules regarding independent contractors, you can order a free IRS publication titled “Tax Guide for Small Business,” publication No. 334. To order, call (800) 829-3676. The IRS also has a toll-free line for people with tax questions: (800) 829-1040.

Source: Internal Revenue Service