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Misclassification Issues

Posted by Chris Harmon | Oct 02, 2023

Your classification as a worker in California matters. Whether it is as a full-time employee, part-time employee, or independent contractor, there are certain federal and state rights and responsibilities that flow from these respective designations. When employers intentionally or mistakenly get it wrong, it is the worker who suffers most. 

At Chris Harmon Law, we will inform you of your rights and advise you whether your position as a worker has been misclassified. If it has, we will work with you and the employer to correct the harm you have sustained. We work hard, so that your hard work is compensated adequately and in accordance with the law. Contact us today at (800) 520-1924 to schedule a Free Consultation and to learn more about employee classifications, damages when misclassified, and what to do about it.

Worker Classifications in California

Classifications are a way to organize workers based on federal and state employment laws, including employee benefits and taxes. There are pros and cons to each classification, which is why it is important the worker is appropriately classified. Misclassification can harm the worker, putting them at a disadvantage and triggering potential legal action. 

The two basic types of classifications are: 

  1. Employee; and 
  2. Contractor.

Each of these types have sub-types, all of which have their own characteristics and significance in terms of employment laws, benefits, and taxes.

What is the ABC test?

Under the ABC test, a worker is considered an employee and not an independent contractor, unless the hiring entity satisfies all three of the following conditions:

  • The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
  • The worker performs work that is outside the usual course of the hiring entity's business; and
  • The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Below is a summary of the California Supreme Court's explanation of how to apply the ABC test.

Part A: Is the worker free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact?

In analyzing Prong A of the ABC test, the California Supreme Court in Dynamex explained:

  • A worker who is subject, either as a matter of contractual right or in actual practice, to the type and degree of control a business typically exercises over employees would be considered an employee.
  • Depending on the nature of the work and overall arrangement between the parties, a business need not control the precise manner or details of the work in order to be found to have maintained the necessary control that an employer ordinarily possesses over its employees.

The California Supreme Court in Dynamex provided the following examples of Prong A being applied:

  • An employer failed to establish that work-at-home knitters and sewers who made the clothing were sufficiently free from the company's control where the employer provided the workers with the same patterns. The court reasoned that “[t]he degree of control and direction over the production (…) is no different when the sweater is knitted at home at midnight than if it were produced between nine and five in a factory.” (Fleece on Earth v. Dep't of Emple. & Training (Vt. 2007) 181 Vt. 458, 923 A.2d 594.)
  • A construction company proved that a worker who specialized in historic reconstruction was sufficiently free of the company's control where the worker set his own schedule, worked without supervision, purchased all materials using his own business credit card, and had declined an offer of employment proffered by the company (Great N. Constr., Inc. v. Dept. of Labor (Vt. 2016) 204 Vt. 1, 161 A.3d 1207).

PART B: Does the worker perform work that is outside the usual course of the hiring entity's business

  • Employment proffered by the company (Great N. Constr., Inc. v. Dept. of Labor (Vt. 2016) 204 Vt. 1, 161 A.3d 1207).

In analyzing Prong B of the ABC test, the California Supreme Court in Dynamex explained:

  • Contracted workers who provide services in a role comparable to that of existing employees will likely be viewed as working in the usual course of the hiring entity's business.

The California Supreme Court in Dynamex provided the following examples of Prong B being applied:

  • Prong B is satisfied (e., services are not part of the hiring entity's usual course of business):
    • When a retail store hires an outside plumber to repair a leak in a bathroom on its premises.
    • When a retail store hires an outside electrician to install a new electrical line.
  • Prong B is not satisfied (e., services are part of the hiring entity's usual course of business):
    • When a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company.
    • When a bakery hires cake decorators to work on a regular basis on its custom-designed cakes.

PART C: Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity?

In analyzing Prong C of the ABC test, the California Supreme Court in Dynamex and subsequent appellate court decisions explained:

  • The hiring entity must prove the independent business operation is actually in existence at the time the work is performed. The fact that the business operation could come into existence in the future is not sufficient. 
  • An individual who independently has made the decision to go into business generally takes the usual steps to establish and promote that independent business.

Examples of this include:

  • Incorporation, licensure, advertisements,
  • Routine offerings to provide the services of the independent business to the public or to a number of potential customers, and the like.
  • Prong C is not necessarily satisfied:
  • Where the hiring entity unilaterally assigns the worker the label “independent contractor.”
  • Where the hiring entity requires the worker, as a condition of hiring, to enter into a contract that designates the worker an independent contractor.

If an individual's work relies on a single employer. For example, Prong C was not satisfied where a taxi driver was required to hold a municipal permit that may only be used while that driver is employed by a specific taxi company (Garcia v. Border Transportation Group (2018) 28 Cal.App.5th 558, 575).

Consequences of Worker Misclassification

Some people choose to work as a freelance contractor because it gives them the kind of freedom and flexibility they need or want in their professional and personal lives. Freelance contractors, however, do not receive the same kinds of benefits and protections that employees receive. So, if you are legally an employee but the employer treats you like a freelance contractor, that's a problem. The consequences you face from worker misclassification are many, but they vary in degree depending on the circumstances. Below are some of the most common forms of harm a misclassified worker may experience.

California law allows civil penalties to be charged to employers that intentionally misclassify workers.

The fine can range between $5,000 and $15,000 per violation, and if there is a pattern of willful misclassification, the courts can fine employers an additional $10,000 to $25,000.

If an employee is misclassified for the purpose of not being paid minimum wage or overtime pay, the employer can be penalized for up to three years' worth of backpay the employee would have been entitled to. In addition, there may also have been violations of the employee's meal and rest period breaks.

Employers that intentionally misclassify employees may be subject to civil penalties for failing to pay them in full or on time. The penalties can include:

  • $100 for the first violation for the failure to pay full wages, for each employee.
  • $200 for each subsequent failure to pay violation, for each employee, and an additional 25% fine of the amount unlawfully withheld.

When employers willfully fail to pay final wages on time after a worker's employment ends, they can be required to pay a full day of wages for each full day that payment is delayed, which can accrue for up to 30 days.

Employers must comply with all recordkeeping requirements of the California Labor Code. That includes providing itemized wage statements to hourly workers. When these records do not exist, due to employee misclassification, not only can the courts order the employer to pay fines, but the workers can sue for failure to comply.

Failure to meet wage statement and recordkeeping requirements in the state of California is also a crime that can be charged as a misdemeanor, which can result in up to a year in jail and fines of up to $1,000.

If an employer owes a worker money due to misclassification, the court can require the company to pay interest on the amount that it owes the worker.

The courts can order employers to pay attorney's fees and court costs for employees who have been forced to sue.

When the IRS determines that a worker is an employee, and not an independent contractor as he or she was misclassified, the government agency can require the employer to pay tax penalties. This is true whether the misclassification was intentional or accidental. In addition, if the IRS finds that an employer or worker willfully enters an independent contractor arrangement to evade taxes, it is a crime that can be charged as a felony. The penalties include up to five years of prison time and up to $100,000 in fines.

Contact an Employment Law Attorney  Today

The consequences of worker misclassification are significant. The employer will likely not advise you of your rights; you have to figure it out yourself. Even when you realize your employment is misclassified, you may not speak up about it because you fear risking your job.  At Chris Harmon Law, we help clients understand their rights, identify worker misclassification, and seek proper remedies. We will be there with you each step of the way. An employer cannot terminate your position or retaliate against you for standing up for your rights – but that does not mean they will not try. We will provide solid advice, investigate thoroughly, negotiate competently, and guide you through the process to ensure your employee rights are upheld and that the company complies with relevant laws and rules.  At Chris Harmon Law, we are here to ensure that your hard work is compensated in accordance with the law. Contact us by filling out the online form or calling us at (800) 520-1924 to schedule a Free Consultation and to learn more about the recourse you can take.

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