Employment Misclassification

The classification of workers as employees—rather than independent contractors—is an issue that has received a great deal of attention and publicity in the State of California and remains an increasingly critical and important issue that carries substantial consequences for employers and employees alike.

To begin, there are a number of differences between employees and independent contractors.  The most obvious is taxation.  If you are classified as an employee, the employer will deduct payroll taxes, including such things as Social Security and Medicare, from your compensation and deposit those withholdings on your behalf with the government.  In the alternative, when you are an independent contractor, you are paid a straight sum with no withholdings and are then obligated yourself individually to make the appropriate tax payments to the government.  Thus, taxation is entirely the working independent contractors’ responsibility, which can be difficult and complicated.  In addition, employees have the opportunity to have access to a number of other benefits and protections including the eligibility for benefits, overtime and double-time compensation, leaves of absence, workers’ compensation, and the mandatory reimbursement for business expenses.

In California, there are very few employment situations and circumstances when a worker can be properly and legally classified as an independent contractor.  The California Supreme Court determined that, to be properly classified as an independent contractor the worker must be: (1) free from the specific direction and control from the Company when the worker is performing the assignment or service for which they have been hired; (2) the actual work being performed is different, or outside the scope, of the primary work the Company performs; and (3) that the worker is engaged in an independent profession or trade that is the same as the work being performed.

To provide what might be an illustrative example, an individual owns and operates a business in which they design, setup, and maintain networks for small businesses.  The worker is hired by a restaurant to install a network inside the restaurant location so that its customers can access WIFI and is also retained to check the system on a monthly basis.  The restaurant hires the worker for this specific task then leave it to the worker to complete the work and accomplish the objective.

In this example, the worker would likely qualify as an independent contractor because they own and operate their own business in an established area and trade, perform the work without supervision and, finally, perform work (network design and maintenance) in an entirely different field than the customer (a restaurant).

In contrast, since they can save considerably in terms of insurance, taxes, and employment benefits, many employers simply classify workers as independent contractors without first determining if the applicable analysis allows them to do so.  For example, an employer might classify its salespeople as independent contractors.  In practice, the employer controls all sales objectives and directives, oversees the sale of products, and subjects employees to oversight and discipline.  At the same time, the employer has the workers selling the very products the business produces.  In this instance, there is little question the worker is misclassified as an independent contractor instead of an employee.

Misclassifying an employee as an independent contractor carries significant consequences.  Employees who were misclassified as independent contractors may be entitled to minimum wages, overtime wages, and double-time wages, reimbursements for business expenses and, in certain cases, statutory penalties.  Employers might also be required to pay back taxes and numerous penalties.

If a worker in the State of California is classified as an independent contractor, or is concerned they may be subject to that classification, they should immediately consult an attorney for legal advice.