Independent Contractor Misclassification Can Lead to Significant Liability
California employers must abide by a spate of rules and tests governing independent contractor classification. California’s strict “ABC” test considers all workers employees unless a company can establish that the worker (a) is free from its control and direction; (b) performs work outside the usual course of the company’s business; and (c) operates as an independent business of the same nature as the work performed.
The California legislature created several somewhat arbitrary exceptions to the ABC test, which the full Ninth Circuit Court of Appeals recently upheld.
If an exception applies, the company must still establish the worker satisfies a separate multi-factor test that primarily focuses on the extent of the company’s right to control the manner and means of work performance. The company must also satisfy other state and federal criteria, including the IRS factors and the federal Department of Labor’s Final Ruleunder the Fair Labor Standards Act.
Misclassification consequences can include liability for unpaid wages for up to four years including potential overtime and missed breaks; itemized wage statement violations up to $4,000 per worker; waiting time penalties; liability under California’s Private Attorneys General Act; and attorneys’ fees and court costs. Deliberately misclassifying workers can lead to additional penalties from $5,000 to $25,000 per violation.
Misclassification red flags:
- No written independent contractor agreements;
- Out-of-date agreements;
- Incorrectly analyzing the ABC test and its exceptions;
- Paying someone on 1099 basis upon request or to avoid payroll taxes;
- Hiring freelancers who have – or claim to have — other full-time jobs;
- Hiring freelancers to work on an exclusive or full-time basis;
- Hiring freelancers whose main area of expertise is in a different field;
- Rehiring former employees as independent contractors for the same job;
- Having freelancers perform central functions;
- Paying freelancers by the hour;
- Paying freelancers via direct deposit;
- Not requiring invoices;
- Providing “benefits” such as paid vacation and expense reimbursements; and
- Regulating the worker’s schedule and supervising performance against employees on payroll.
Take-Aways:
Assume workers are employees unless they unequivocally meet all applicable standards, tests, and criteria for independent contractor status. Consult with a skilled management-side employment attorney to navigate through this process and resolve any potential “red flags.”
For further information, please contact Tim Bowles, Cindy Bamforth or Helena Kobrin.See also:
- Add Them to the Pile – Yet More Federal Criteria for Independent Contractors (April 15, 2024)
- We Offer an Ounce of Prevention – Make a Wage Audit a Priority (February 15, 2024)
- Department of Labor $5.6 Million Judgment for Drivers Miscast as Independent Contractors – Feds Fed Up with Trucker Misclassification (February 3, 2023)
Cindy Bamforth
June 14, 2024