Employers Who Misclassify Workers Put Themselves at Risk

Many laws and rules dictate whether an employer can legitimately classify someone as an independent contractor (I/C).  They include California’s strict ABC three-factor test and the numerous exceptions enacted by the legislature as part of AB 2257, as addressed in our What’s New in 2021 series (links below).

Each state has its own rules, in addition to the IRS behavioral, financial, and relationship factors, and the federal Department of Labor criteria which apply nationwide.

Some employers mistakenly classify workers as I/Cs to avoid paying withholding taxes or because a worker asked for none of the deductions from his/her checks. Others misclassify workers as I/Cs out of ignorance of the law or think they know better.  Doing so can be an expensive mistake.

It is a rare month when we are not defending a business challenged for such misclassification.

Perhaps most ironic are the claims from employees who asked to be treated as I/Cs.  Yet, empathy for a worker’s financial stress is not a defense to misclassification.  Neither is the money saved by not deducting taxes.  Rather, government entities view these practices as a company’s attempts to gain an unfair advantage over employers who follow the law.

Take-Aways: A worker is legally an I/C only if the relationship meets the applicable legal factors. Employers are well advised to consult with an attorney and ensure someone really qualifies as an I/C before classifying the person as such. As the fines and penalties can be substantial, this is particularly critical in rigid “ABC” states like California.

For further information, please contact Tim Bowles, Cindy Bamforth or Helena Kobrin.

See also:

• California’s Newest Independent Contractor Law Part I: Revamped Business-to-Business Exceptions (September 17, 2020).
• California’s Newest Independent Contractor Law Part 2: Revised Referral Agency Exception (September 24, 2020).
• California’s Newest Independent Contractor Law Part 3: “Fine Artists” and Other Clarified and Expanded Professional Services Exemptions (October 1, 2020).
• California’s Newest Independent Contractor Law Part 4: Amateur Umpires and Referees Among Expanded “Specified Occupations” Exceptions to Strict Test(October 22, 2020).
• California’s Newest Independent Contractor Law Part 5: New “Music and Entertainer” Exemption from the Strict “ABC” Test (October 29, 2020).

Helena Kobrin
September 16, 2022