In 2015, after reviewing the findings in multiple state-level studies in the US, the economic (EPI) saw a trend indicating up to 20% of employers were misclassifying a minimum of one worker at their business under the label of an independent contractor (IC). According to an even more recent 2020 analysis of state-level reporting on misclassification by the National Employment Law Project (NELP), up to 30 percent of employers may now wrongly classify their workers. Misclassification is a pervasive issue in the American workforce, and unfortunately, it also plagues the San Francisco Bay Area. Every year, millions of workers are affected by this issue, causing government agencies to spend billions of dollars and shorting workers on their hard-earned benefits through wage theft. Most recently, The San Francisco District Attorney sued Doordash, a food delivery platform and a major competitor in the ever-growing gig economy, for misclassifying employees in 2022.
Why is labeling workers correctly so important?
Properly categorizing workers is a vital facet of employment for employers and workers. Misclassification has significant consequences in various parts of an employment relationship, including wage and hour requirements, access to essential benefits, perks, and legal protections. When businesses categorize their workers as “independent contractors” rather than “employees,” they are subjecting them to financial burdens and depriving them of basic labor rights.
Serving the San Francisco Bay Area, we have taken on many complex cases stemming from intentional misclassification. While touching on California’s corresponding regulations, here we will explore the difference between the most misclassified types of employment, the substantial consequences for employers, the profound impact on workers, and the damages and compensation you may be entitled to as a misclassified worker in California.
Note: A trusted and well-respected attorney can provide you with the support you need to navigate this complex issue.
Misclassification of Employees
Employers may intentionally misclassify their employees for their own advantage in different ways and always at a cost to the worker.
An employer may classify you as a salaried employee when you should be designated as hourly. It is not uncommon for employers to categorize their workers as salaried employees in order to evade paying them overtime wages. Knowing whether your job is exempt or non-exempt can make a big difference in overtime pay. The Fair Labor Standards Act (FLSA) provides guidance on making this distinction and protections for when misclassification cases are brought to court. You may be entitled to additional compensation if your job involves time-sensitive tasks or non-exempt duties. Understanding the difference between these two roles is important to ensure you receive the fair pay you deserve.
Your employer may label you an independent contractor but treat you like an employee. Sometimes, employers may designate their laborers as independent contractors to circumvent their responsibilities or obligations under employment regulations. However, this classification can lead to the stripping away of protections, benefits, and bonuses for you, the employee. Discerning whether you are an independent contractor or an employee involves carefully considering diverse factors in California. Like many others, the state of California has adopted a method for distinguishing employees to combat misclassification, known as the ABC test. The test is a key component in determining your classification, so it’s vital to understand how it works and what it entails. For some individuals, the test may not be a straightforward process. If this is the case, it is highly advisable to seek the guidance of an adept attorney who is well-versed in California’s employment law. Recently, the state has significantly altered regulations concerning independent contractors, employees, and gig workers, particularly as the gig economy has shown rapid, sustained growth.
ABC Test, Assembly Bill 5, and The Dynamex Decision
Despite facing opposition from the broader business community in California, the Dynamex ruling was ultimately advanced by the California Supreme Court. The landmark ruling established a new standard for worker classification and introduced the ABC test. Employers could no longer simply classify workers as independent contractors. This outcome could result in more workers being classified correctly as employees and entitled to various benefits and protections. Assembly Bill 5 or AB5, which went into effect at the start of 2020, incorporated the Dynamex decision into California Labor Code Section 2775. AB5 expanded the application of the ABC test beyond wage order cases, including many gig economy workers. It applied to the California Labor Code, Unemployment Insurance Code, and Industrial Welfare Commission wage orders. Workers would now be presumed employees, and an employer must prove a worker to be an IC via the more rigorous ABC Test.
Understanding The Differences Between Independent Contractors and Regular Employees
In California, there are distinctions between Independent Contractors and Regular Employees. Below is a breakdown of differences under different categories.
Control and Independence:
- Independent contractors have more freedom in their work, choosing when and how to complete tasks. They often run their own businesses and decide on the methods for accomplishing the job they have been engaged in. Employers do not manage ICs, who commit to completing the project or role independently.
- Similarly, an employee is responsible for completing tasks and responsibilities required by the employer, but the difference lies in that the employer outlines the duties, and the employee is subject to their control and direction. Employers typically dictate work schedules, provide specific instructions on completing tasks, and often exercise governance over employee work methods. The employer also takes on responsibilities in this relationship, such as following meal breaks, rest breaks, and accommodation needs, providing certain benefits, and is to uphold the regulations and specifications under specific labor laws.
Obligations Regarding Taxes:
- As an independent contractor, If you’re self-employed, you must handle your own income tax payments because your employer doesn’t deduct anything from your compensation.
- In contrast, employees have their income taxes, Social Security taxes, and Medicare taxes deducted from paychecks by their employer. In addition, employers pay Social Security and Medicare taxes for their employees.
Benefits and Protections:
- Independent Contractors: Employee benefits such as health insurance, retirement plans, and workers’ compensation are unavailable to an IC. Moreover, they do not qualify for certain employment laws, including minimum wage, overtime requirements, sick leave pay, or unemployment benefits under the hiring party.
- Regular Employees: Employees may qualify for various benefits, such as health insurance, retirement plans, and workers’ compensation. Additionally, they are entitled to several employment protections, including minimum wage, overtime pay, rest and meal breaks, and defense against discrimination.
Business Expenses:
- Independent Contractors: Typically, ICs are responsible for shouldering the brunt of their business expenses, including elements like equipment, supplies, and transportation costs. However, if a mutually agreed upon contract is established and signed, it may outline specific materials or expenses that the party engaging the contractor’s services will cover.
- Regular Employees: Employers typically provide the necessary tools, equipment, and resources for employees to perform their job duties. They may also reimburse employees for some, but not all, work-related expenses.
Relationship Duration and Permanence:
- Independent Contractors: In the IC industry, professionals often work on a project basis or sign short-term contracts with their employers. These employment arrangements are usually temporary and can be terminated once the agreed-upon work is completed.
- Regular Employees: Employees have a long-term and semi-stable relationship with their employer. The connection is not limited to a particular assignment and may continue indefinitely unless either party decides to terminate it.
It’s important to note that determining worker classification is not solely based on individual preferences or contractual agreements. As mentioned earlier, California law uses the “ABC” test to distinguish whether a worker is an independent contractor or an employees. This test evaluates the worker’s level of control, independence, and integration within the employer’s business operations.
Consequences of Misclassification on Employers
Unfortunately, the unethical practice of improperly labeling employees or “misclassifying” workers is all too common across the United States. Although California is a crusader regarding workers’ rights and protections, this does not stop owners and bosses from trying to cheat the system. Some employers seek a way to escape their financial and legal obligations or, frankly, line their pockets by cutting corners. However, once the employer’s dubious tactics come to light, their actions inevitably lead to more trouble for themselves. Employers in California may even face civil penalties when they fail to pay their workers or for paying employees late. It is important to ensure that employees receive their rightful compensation on time, and failure to do so can result in fines of $100 for first-time violations, with subsequent violation fines doubled. Penalties for misclassification of employees are far greater.
If an employer attempts to avoid paying overtime or is found to be paying below minimum wage, they may be liable for compensating the affected employee(s). Employers in California may face penalties of up to three years’ worth of unpaid wages or “backpay.”
California courts impose civil penalties on employers culpable of deliberate mis-categorization that can amount to charges as high as $15,000. With penalties imposed per violation, the amount owed can become staggering. Further, if the employer is a repeat offender or should the court assess and unveil a pattern of intentional improper mislabeling of employees, the employer may be subject to extra penalties, with potential charges reaching up to $25,000.
Note: there are various time limits to file a wage claim for items like failure to produce payroll records, bounced checks, if the employer made an oral agreement to pay more than the minimum wage, or in matters related to written contracts. According to the California Department of Industrial Relations, these time constraints vary from 1 to 4 years, so it is best to act swiftly and contact a skilled employment law attorney who can answer any questions and examine your case.
Impacts of Misclassification on Employees
Misclassifying workers is a form of fraud that comes at a high price for the average worker. Misclassifying workers as independent contractors instead of employees carries severe consequences for California workers. Some negative outcomes involve wage and hour violations, whereby employees who are wrongly classified may be deprived of minimum wage, overtime pay, and breaks, leading to financial difficulties. Moreover, the absence of employee benefits makes misclassified workers ill-equipped to face illness or injury, meet retirement planning goals, and pursue and collect unemployment. These benefits include, but are not limited to, health insurance, retirement plans, sick leave, worker’s comp, and paid time off. They also face limited legal protections, putting them at risk of discrimination, unfair termination, and the inability to access workers’ compensation benefits.
Misclassified workers are burdened with higher tax liability as they pay the employer and employee shares of Social Security and Medicare taxes. They are also denied expense reimbursement, further impacting them financially. The absence of employment security exposes these workers to job insecurity and the potential for termination without notice or valid justification. Inadequate workplace safety measures put misclassified workers at a higher risk of accidents and injuries due to a lack of training and protective or safety equipment.
Moreover, misclassification impedes professional progress, as most employers invest more in the development and training of employees rather than that of an IC they may employ. Misclassified workers meet resistance and barriers when it comes to collective action or trying to advocate for their rights and better working conditions. Across the board, the misclassification of workers has profoundly negative implications that undermine their rights, financial well-being, and overall job security.
Contact Our Skilled Employment Attorneys to Help You Navigate the Road to Recovery; Damages and Compensation
If you have been misclassified, you may be entitled to compensation for certain damages like benefits, protections, expense reimbursement, lost or unpaid wages, and liquidated damages in cases of purposeful misclassification. You may file a lawsuit against your employer and, in some cases, be eligible to file an additional lawsuit (when specific labor code violations have occurred), known as a Private Attorney Generals Act lawsuit, in which you may receive a portion of the sum, with the remainder going to the state.
If you believe you are a misclassified worker, seeking the damages and compensation you are owed is crucial. Contact an experienced California Bay Area employment lawyer who can assess your unique circumstances, gather evidence, and help file a legal claim or lawsuit on your behalf.
