In the dynamic landscape of California employment law, properly classifying workers as employees or independent contractors is a critical issue. California's definitions and requirements for independent contractors and employees differ in many different situations, and that alone can be confusing and lead to misclassification. Other times, it really is an issue of just not knowing or understanding. In other cases, it may be that the job changes but the classification is not changed along with it. Regardless, misclassifying workers can lead to costly legal battles, fines, and penalties for employers.

As an employment law specialist, I will advise you whether you have ever misclassified your workers as independent contractors. If you have, I will work with you and the employee to minimize the damage you may have to pay. Contact our office today through filling out our ONLINE FORM or calling us at (310) 769-6836 to schedule a free consultation and to learn more about the crucial test in employee v. independent contractor classifications, damages when misclassified, and what to do about it.

Worker Classifications in California

Classifications are a way to organize workers based on federal and state employment laws, including employee benefits and taxes. There are pros and cons to each classification, which is why it is important the worker is appropriately classified. Misclassification of workers can trigger potential legal action. 

The two basic types of classifications are: 

1. Employee; and 
2. Independent Contractor.

Each of the types has its own characteristics and significance in terms of employment laws, benefits, and taxes.

Employees

When deciding whether a person is an employee, most cases look at the extent of control the employer has over the employee. If the employer controls what the worker does and how they do it, then the worker should be classified as an employee, not an independent contractor. Employees can be full-time or part-time, temporary or permanent. Employees are also either exempt or non-exempt. As to the difference between exempt and non-exempt, see our article Employee Misclassification - Exempt v. Non-Exempt.

Characteristics of Employee Classification

• The employer is liable for employee errors and/or accidents
• The employer controls the means and manner of work 
• The employer trains the employee to perform the job
• The employer sets the work hours for the employee
• The employer purchases materials and supplies
• The employer provides and controls equipment and tools
• The employer can require specific attire while at work (e.g., uniforms)
• The employer hires and fires employees
• The employer determines the wage, salary, or commission
• An employee accepts the wage, salary, or commission determined by the employer
• An employee often works at the employer's business location
• An employee usually works for one employer
• An employee can typically quit working for an employer at any time

Independent contractors, on the other hand, who are more often hired for a project or on a freelance basis, are neither exempt nor nonexempt. Independent contractors are considered to be self-employed and:

• Free from direction and control of the employer
• Possess necessary or specific skills and training
• Have a separate business location
• Perform services for multiple customers
• Establish own work hours or schedule
• Determine own price for contracted services
• Provide own equipment and tools used to complete the job
• Supply own materials needed to do the job
• Are personally liable for errors and/or accidents
• File self-employment taxes
• Can hire and fire workers, typically sub-contractors
• Can legally complete each contract.

Independent contractors are ineligible for employee benefits, which is why employers often prefer them. 

DETERMINING INDEPENDENT CONTRACTORS 

In California, when you hire a worker for your business, he or she is considered as your employee by default. However, if you want to hire somebody as your independent contractor, you must make sure if you can satisfy all the elements of the specific legal test California uses in various employment situations. In most wage and hour law context, California utilizes the ABC test to determine if a worker should be classified as an independent contractor. This test lays out three distinct criteria that must all be satisfied for a worker to be considered an independent contractor:

A - Control 

The employer must demonstrate that the worker is free from the control and direction typically exercised over employees. This includes the ability to set their work hours, choose where they work, and have independence in their tasks. For example, if a trucking company requires driver to keep truck clean, to obtain the company's permission before transporting passengers, or to go to the company's dispatch center to obtain assignments not scheduled in advance, the company fails to meet this part of the test because it controls over the detail of the worker's job.

B - Outside the Usual Business

The work performed by the individual must be outside the usual course of the hiring entity's business. For example, if you are a law office, hiring an independent contractor plumber will likely pass this part of the test. However, if you run a bakery, hiring an independent contractor baker to make cakes for your clients would likely not pass this part of the test because the worker performs the usual work as other employees of the bakery would perform.

C - Independent Business

The worker must be engaged in an independently established trade, occupation, or business of the same nature as the work performed. This means the worker should have their own business, separate from the hiring entity, offering their services to others. For example, if the independent contractor has his own clientele, utilizes his own business cards or invoices, advertises his services or maintains a separate place of business and telephone listing, an hiring entity can likely pass this part of the test.

It is important to note that different tests are used to determine the worker classification in other contexts, such as anti-discrimination law, tax law, and worker's compensation law. Although each test is slightly different, the most important factor is how much control a hiring entity has over the details of the worker's job. The more control the hiring entity has, the more likely the worker will be considered as an employee.

Consequences of Worker Misclassification

Some people choose to work as a freelance contractor because it gives them the kind of freedom and flexibility they need or want in their professional and personal lives. Freelance contractors, however, do not receive the same kinds of benefits and protections that employees receive. So, if an employer treats its employee like a freelance contractor, this misclassification can lead the employer to:

• Incorrectly state the type of work to be performed by the worker
• Under-report payroll
• Under-report the number of employees

The consequences you face from worker misclassification are many, but they vary in degree depending on the circumstances. Below are some of the most common forms.

1. Back Wages and Benefits Violations: Misclassified workers may be entitled to back wages, minimum wage, overtime pay, and benefits that they should have received as employees. Employers may also owe them premiums for missed meals and rest breaks. Employers may be required to pay these amounts retroactively.

2. Wage Statement Penalties: If misclassification is found, employers are considered provided inaccurate pay stubs to those misclassified employees. These workers can recover $50 for the initial pay period, $100 for subsequent pay periods, up to $4,000.  

3. Waiting Time Penalties: Because employers are considered not paid these overtime payment and meals and rest break premiums to those misclassified employees, they are also obligated to pay penalties for the payments not paid on time. The unpaid overtime payment and meals and rest break premiums are treated as unpaid wages and employers must have paid these within 72 hours from the employee's last day of work if they properly classify the workers as nonexempt. The workers can recover their daily average wage for each day the wages are not paid, up to a maximum of 30 days.

4. Unpaid Wage Penalties and fines: Employers who misclassify workers may face penalties and fines imposed by state labor agencies. These fines can vary depending on the severity and frequency of the misclassification.

5. Class Action Lawsuits: Misclassification can lead to class action lawsuits, where multiple affected employees join forces to seek compensation for unpaid wages and damages.

6. Legal Costs: Defending against misclassification claims can result in substantial legal costs and attorney fees.

7. Taxes and penalties: Employers may be responsible for unpaid payroll taxes and contributions to unemployment insurance and workers' compensation funds. Failure to pay these taxes and contributions can result in additional penalties.

8. Government Audits: Misclassifying employees may trigger government audits by agencies like the California Labor Commissioner's Office, resulting in additional fines and penalties.

It is advisable that California employers regularly assess your worker classifications to ensure compliance with the applicable worker classification tests and California employment laws. If uncertain about classification, consult an experienced employment attorney to minimize legal risk.

Contact Our Office

With years of experience navigating the intricacies of California employment law, I am here to assist California employers in understanding and addressing worker misclassification issues. Remember, proper worker classification is crucial to avoiding costly legal consequences. Don't let worker misclassification disrupt your business. Contact us today by filling out our ONLINE FORM or calling us at (310) 769-6836 to discuss your unique situation and find a tailored legal solution.