PREFERENCE DOESN’T MATTERIncorrect Classification Leads to Massive Liability « Law Offices of Timothy Bowles | Top Employment Law Firm in Los Angeles


Incorrect Classification Leads to Massive Liability

A prudent company must consider state and federal law before deciding to classify a worker as an independent contractor rather than an employee. Unfortunately, many businesses make such decisions for illegitimate reasons including avoidance of payroll record-keeping and employer-side taxes or the hiree does not want taxes withheld.  These arbitrary preferences can lead to hiring an employee as an independent contractor, often without even entering into a written agreement as required under most pertinent laws.

State and federal government agencies have been pursuing companies aggressively for misclassification, with many resulting judgments into the hundreds of thousands or millions.  See, for example, Cautionary Tale Episode 62, Department of Labor $5.6 Million Judgment for Drivers Miscast as Independent Contractors: Feds Fed Up With Trucker Misclassification (February 2023); Cautionary Tale Episode 61, Take Care With Caregivers: $1.8 Million Citation for Independent Contractor Misclassification (January 2023).

Each state has its own laws on independent contractor classification, and employers need to consult those laws for correct classification of out-of-state workers.  We have addressed California law, currently adopted under AB 2257, covering the California independent contractor ABC test and the many lobbied exceptions adopted by the state legislature. See links below.

There are also various sources of federal law concerning correct designation of independent contractors.  See, Fair Labor Standards Act Fact Sheet, including discussion of U.S. Supreme Court independent contractor factors; IRS discussion and links re independent contractors.

The potentially astronomical cost of misclassifying workers as independent contractors should motivate employers to only treat someone as an independent contractor if that person’s situation fully meets all legal requirements.

Take-Aways: Companies should always proceed with caution in deciding whether to hire someone as an independent contractor.  A person who will be an integral part of a company for a long time to come and whose functions the company controls should be an employee in virtually every instance.  This is an area where assistance from an experienced attorney could help a company avoid expensive mistakes.

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

See also:

Helena Kobrin
May 5, 2023

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