What is Employment Misclassification in California

There are many substantial differences between an employee and an independent contractor like:

• Employees are protected by various labor laws and independent contractors are not.
• Employees are eligible for unemployment benefits and independent contractors are not.
• Employees are entitled to worker’s comp and independent contractors are not.
• Independent contractors pay full federal payroll taxes and employees do not.
• Independent contractors control when and how they perform their work and employees do not.

It is important that you are classified correctly for the work that you do. California state law has specific guidelines for determining if a worker should be considered an employee or an independent contractor and what kind of consequences exist for employers found guilty of misclassifying employees.

 

What is Employment Misclassification?

Sometimes, an employer may decide that they want the level of control that comes with having an employee without any of the responsibility. They achieve this by hiring workers as independent contractors while still treating them as employees. This way, they avoid having to pay taxes, follow wage and hour regulations, provide worker’s compensation, and abide by anti-discrimination laws. Misclassifying an employee may save employers money but it degrades workplace protections for the employee and is considered fraud.

 

What Is the Difference Between an Independent Contractor and an Employee?

When comparing the pros and cons of being an employee or an independent contractor, the main points that are generally brought up revolve around independent contractors having more freedom while employees are provided more protection and stability. Independent contractors agree to do a specific job for specific compensation and have full control over the way that job is done. However, being an independent contractor means that an individual is only employed for the duration of the project engagement, does not share in wage law or workers compensation protections, has limited access to company infrastructure and resources, and often times needs to supply their own tools. Employees are typically offered far better workplace protections and benefits as well as eligibility for unemployment, retirement, and health insurance. In exchange, their employer has the primary control over when, where, and how they do their work.

 

Why is Employee Misclassification So Important?

Different classifications exist for a reason. Employees have a right to the protections and benefits outlined by the law. Independent contractors have a right to freedom and control over their own work. When an employee is classified as an independent contractor, the employee is not the only one who suffers. Misclassification is a way for employers to avoid paying their share of taxes for Social Security and Medicare as well as premiums for things like worker’s compensation, unemployment, and short-term disability. When employers are not paying their fair share into the systems that support a healthy labor force, the burden is placed on the employees. In addition to the transfer of burden, the misclassified independent contractors lose their ability to collectively bargain and be provided wage and employment protections provided to W-2 employees like unemployment and workers compensation.

 

The Pervasiveness of Employment Misclassification

In 2000, the United States Department of Labor had a study conducted that resulted in up to 30% of the employers investigated throughout the country were found to have misclassified employees. As many as 95% of the independent contractors claiming to be misclassified were reclassified as employees. The National Employment Law Project released a report that reviewed 10 California employers between 2017 and 2018 and discovered that 9 of them had violated state classification laws. Then, in 2019, researchers in Berkley at University of California discovered that 23% of truck drivers and 19% of janitors throughout California were being misclassified.

 

Which Industries Have Been Hit Hardest by Employee Misclassification

Some of the industries that contain the highest frequency of employee misclassification include:

• Construction
• Home Care
• Janitorial
• Real Estate
• Transportation
• Information Technology

There has been a great deal of debate regarding how drivers for app-based transportation and delivery companies should be classified. Companies like Uber and Door Dash maintain that their drivers should be classified as independent contractors, but some states have tried to challenge this.

 

Economic Impact of Employment Misclassification

Paying an employee typically costs employers 30% more when compared to an independent contractor because of the costs of paying into employment benefits, taxes, workers comp, and unemployment insurance premiums. This deprives the government and labor protection programs of the funds they need to sustainably operate. Examples of the impacts that misclassification can have at a large scale can be seen with a few examples below:

• The California Department of Labor Standards Enforcements assumes a $7 billion dollar shortage caused by employment misclassification.
• In 2018, Midwest Economic Policy Institute studies showed that 10% of construction workers across Illinois, Minnesota, and Wisconsin were misclassified. This resulted in a loss of roughly 152 million dollars in income taxes, unemployment insurance premiums, and workers compensation premiums. At the individual level, this resulted in independent contractors earning $24K less in benefits than employees. Employers were able to achieve labor force expense reductions of 29% in Illinois, 36% in Minnesota, and 31% in Wisconsin.
• Historical benchmarks established in 1984 indicated that the federal government saw a shortage of $1.6 billion dollars as a result of employee misclassification which would equate to roughly $4.05 billion in 2024.

 

What is the ABC Test?

The ABC test is a list of three qualifying factors that must all be met in order for a worker to be classified as an independent contractor. The test is as follows:

1. The worker has complete freedom and control over when and how their work is completed
2. The work being performed is not part of the usual business for the company
3. The worker performs the work as their own independently established trade

While it is the primary test utilized by California law and many other states, there are some industries or professions where the ABC test is not the best method for determining classification. There are other tests and regulations that are applied in those situations.

 

What is the Borello Test?

The Borello Test examines multiple aspects of the worker, the job, and the employer to determine if the worker is best classified as an employee or an independent contractor.  The Borello Test asks many questions to narrow down classification, such as:

• Who provides the equipment, supplies, and workspace?
• Has the worker made investments into the company?
• Does the worker have their own work or business not related to the company?
• Does the work require any kind of special skills?
• Is the work an important or usual part of the company’s business?
• Is the job being done usually performed by a specialist?
• How long will the job take to complete?
• Does the worker have employees of their own?
• Is the payrate based on time or the work itself?
• Is the relationship at-will or by contract?
• To what extent does the employer have control over the worker?

When courts analyze a case to see if it satisfies the Borello test, they typically use the level of control an employer has over an individual to determine if they are an employee.

 

Why is the ABC Test the Strongest Test?

The ABC Test is considered the strongest test in favor of protecting the workers because it begins with the assumption that the worker is an employee and then requires the employer to prove that they are not. There are other federal based tests that have been determined to be too general, subjective, or biased in favor of the employers. Tests used by the IRS and the standard established by the National Labor Relations Act were both criticized for being easy to manipulate or misinterpret. Another test used by the Fair Labor Standards Act defined “employees” using a broad definition that classified everyone one who worked as an employee. None of these tests proved effective when accurately classifying employees vs independent contractors.

 

The ABC Test in California

In the case Dynamex Operations West, Inc. v. Superior Court of Los Angeles, 4 Cal. 5^th 903 (Calif. 2018), the ABC Test was held as the best way to determine worker classification in compliance with California’s Wage Orders. Assembly Bill 5 was introduced to make the ruling state law and add the ABC Test to the labor code. The bill was passed in 2019 and faced immediate backlash, predominately from the app-based ride share industry who have fought to keep their labor classified as independent contractors.

 

What is AB5?

The emergence of gig jobs has become a hot button issue when it comes to employment classification. Gig jobs are jobs that are extended to individuals who can sign up for work on platforms like Uber, Door dash, Lyft, etc. These workers are allowed to work at their convenience without the rigidity of standard employment, but they also do not receive the same support or stability an employee would. For a short period after these companies emerged, the companies were able to enjoy not paying for their employees’ support programs and taxes. However, the number of gig workers grew to the point where they campaigned to get California Assembly Bill 5 passed in 2019. The new AB5 bill established new standards on which to gauge who received employee benefits and protections in the state of California.

 

The Creation of Proposition 22 in Response to AB5

As soon as AB5 was passed, Proposition 22 was created to prevent it from applying to companies such as Uber and Lyft. They offered their own unique benefits and protections to their workers in exchange for being able to keep them as independent contractors. The proposition was approved in November 2020 and challenged less than a year later in August 2021 when a Superior Court Judge ruled that Prop 22 was unenforceable due to aspects that were unconstitutional. The decision was appealed and then reversed in March 2023.

 

The Expansion of Proposition 22

The companies behind Proposition 22 have been working to expand it on a national level. They have faced opposition from multiple state governments that continue to hold them accountable for employee misclassification. There has been a great deal of discussion and brainstorming regarding possible compromises to strengthen security and protection for these workers without classifying them as employees. Labor unions have suggested implementing collective bargaining rights which have been successful in Great Britain so far.

 

Experience Under AB5

Experts have estimated that up to 1 million workers throughout California have been positively impacted by AB5. It has also been noted that those most commonly reclassified under AB5 tend to be workers in the service industry, trucking, childcare, and various maintenance fields. In addition to Proposition 22, there has been pushback from multiple industries looking for exceptions and exemptions to the ABC Test. Many employers, particularly those in various corners of the app-based gig industry have refused to comply with AB5 and continue to misclassify their workers which has resulted in legal action.

 

Exclusion Groups Under AB5

There are professions that may be considered exempt from AB5 due to aspects inherent in the jobs themselves. There are also some types of professions that are exempt from AB5, but the workers are still entitled to things like unemployment insurance. The main reasons for exemptions include:

• Control over rates and prices
• Control over appointment scheduling
• Directly communicating with customers
• Directly being paid by customers
• Pay rate is at least twice the minimum wage
• Payment based on commissions from sales

Some professions that may be exempt from AB5 and the ABC test include:

• Accountants
• Architects
• Private Investigators
• Real Estate Agents
• Stockbrokers
• Travel Agents
• Youth Sports Coaches
• Cosmetologists
• Freelance Writers
• Graphic Designers
• Hair Stylists
• Manicurists
• Producers
• Songwriters
• Dentists
• Doctors
• Engineers
• Insurance Agents
• Lawyers
• Psychologists
• Veterinarians

Some referral agencies or business to business contractors could be exempt under certain circumstances. It is also important to remember that even if someone is exempt from AB5 and the ABC test, they might still be considered an employee under the Borello test.

 

Employee Status Under Federal Fair Labor Standards Act

On a federal level, the Fair Labor Standards Act regulates employment standards such as wages, record keeping, and child labor. Individuals who fit the description of employee are provided the federal minimum wage of $7.25/hour and overtime pay of 150% of their regular wage for any labor that exceeds 40 hours a week under the FLSA. Independent contractors are not protected by FLSA. The past three presidential administrations have had their own interpretations of how employees should be defined under FLSA. The administration under Barrack Obama increased workers’ rights by expanding the definition of employee while the administration under Donald Trump reversed that decision. This resulted in an estimated 530K workers being reclassified as independent contractors. This was marked as a significant win for employer’s rights that would cost workers $3.7 billion dollars every year. Since the arrival of Joe Biden as president, the decisions to reverse the impacts of Donald Trumps decision has been a priority.

 

Employee Status Under National Labor Relations Act

Employee classification determining protections under the National Labor Relations Act follows the common law test. This is a list of ten factors compiled over the years that have been taken from various court decisions. Similar to the employment definition assigned by the FLSA, the rights of employee’s were expanded under democratic leadership when Obama was president

 

Employment Status Under the PRO Act

In March of 2021, the PRO (Protecting the Right to Organize) Act was passed by the House of Representatives and is receiving support among the Senate. This act was created as an attempt to increase protection for workers throughout the country. One of the ways in which it aims to do this is by making the ABC test the official method for classifying workers under the NLRA.

 

Am I Misclassified as an Independent Contractor?

If you have reason to believe that you may have been misclassified as an independent contractor, you can use the ABC Test. One of the first things to examine at is the level of control you have over your job. This is often a big indication because a common motive many employers have for misclassification is to have all of the control and none of the responsibility. Some questions to ask yourself can include:

• Are you required to work specific hours?
• Are you required to work on-site when it is not necessary for the job?
• Are you required to use equipment supplied by the company?
• Does the company supervise you and dictate how you perform your work?
• Are you not allowed to take on other work?
• Are you paid based on time, such as an hourly rate?
• Is the work you do a regular part of the company’s business?

 

What If I Signed an Agreement Stating Independent Contractor Status?

In the state of California, you can not sign away your right to be classified correctly. Some employers will try to have employees sign agreements to work as independent contractors, but these are unenforceable. If you fall under the legal definition of an employee and do not fit any of the legally established exemptions, then you should be classified as an employee. The courts will not negate this just because you signed a paper claiming otherwise.

 

What Should You Do if You Have Been Misclassified?

If you are being misclassified, you can make a complaint with the applicable government agency such as the federal Department of Labor and the California Division of Labor Standards Enforcement. If you are being misclassified and facing workplace discrimination, retaliation, or wrongful termination that you would otherwise be protected from as an employee, you can speak with an employment attorney. It is always good to have as much evidence as possible and all of the details and information in order when filing a claim or seeking legal advice.

 

What is the Statute of Limitations for Filing an Employee Misclassification Claim?

California has different time limits for different types of employment claims. The limit for a claim for breach of written contract is 4 years while the limit for wage and hour violations is 3 years. Claims involving discrimination, retaliation, and wrongful termination have different limitations for government agency charges and civil lawsuits. It is best to seek legal advice as soon as possible if you think you may need to take action.

 

What Damages Can Be Recovered If Someone Has Been Misclassified?

Civil penalties for violations of AB5 alone can range from $5-15 thousand, which can be increased up to $25 thousand for each violation if they are a repeat offender. Misclassification claims may also recover:

• Back pay for unpaid wages
• Break violation premiums
• Waiting penalties
• Expense reimbursement
• Insurance premiums
• Interest and other fines.

Additional damages may be added if the misclassification claim is also attached to a wrongful termination or worker’s compensation claim.

 

Stop Further Misclassification

In order to help prevent employees from being misclassified, an action can also be made for injunctive relief. In California, this can be done by an individual or an official on behalf of the state. Officials with the power to bring injunctive relief actions include the attorney general, city prosecutors, or city attorneys depending on city population or permission from the attorney general.

 

Contact Mesriani Law if You Have Been Misclassified

Employers who misclassify their employees are stealing money from their workers as well as the taxpayers and should be held accountable. Furthermore, employees have a right to the protections afforded to them by the law. Our firm has spent years winning cases for employees who have had their rights violated. If you have been misclassified and wrongfully terminated due to discrimination or retaliation, call Mesriani Law Group today for a free consultation.

 

Employment Misclassification FAQs

What is the penalty for employee misclassification in California?

Employers who misclassify their workers can face thousands of dollars in penalties per violation. They may also have to pay additional fines and related penalties for wage and hour violations. They may also have to compensate the affected employees for unpaid wages, benefits, other damages, and fees.

What is the California misclassification law?

Assembly Bill 5 is the California state law that utilizes the ABC Test as the primary method for determining employee classification. The test examines the work as well as the working relationship between the parties, placing the burden of proof on the employer to show that the worker is an independent contractor. Other legislation such as Proposition 22 and AB2257 were brought forward to modify or add exemptions to AB5.