The way an employer defines a worker matters – the worker can be either an employee or an independent contractor. The advantages and disadvantages accompany both of these two classifications. An employer, however, benefits when it classifies a worker as an independent contractor rather than an employee. So, sometimes, an employer may take advantage of the independent contractor status to your detriment. Usually, an employee is misclassified if he or she is paid in cash only, paid by the company or personal check without the employer deducting payroll taxes, forcing an employee to create a corporation or LLC, etc.
At Sirmabekian Law, we know the tactics employers use to deny workers full benefits of employment. We also know the law. We will review your case and advise you if your employer has improperly classified you as an employee or as an independent contractor. Here, we answer questions our clients often ask us at the beginning of their consultation, like:
- How does California define employee versus independent contractor, and what do these definitions mean?
- Why Would Employers Classify a Worker the Wrong Status?
- How Do You Know if You Qualify as an Employee versus an Independent Contractor in Los Angeles?
- What are the Consequences When an Employer Misclassifies You?
If you have specific questions, contact us today to schedule a free initial consultation.
California law specifies which workers qualify as employees and which qualify as independent contractors. In addition to the difference in definitions, these two classifications carry different protections, freedoms, benefits, and disadvantages.
California Labor Code § 3351 states that an
“Employee” means every person in the service of an employer under any appointment or contract of hire or apprenticeship, express or implied, oral or written, whether lawfully or unlawfully employed…
The importance of employee classification is the rights that flow from it. As an employee, your employer must abide by California’s extensive wages and hours laws. California employment laws protect an employee’s right to:
- overtime pay;
- meal breaks;
- rest breaks; and
- minimum wage.
Employees often benefit from other things, like vacation leave, medical leave, health insurance, and other compensation/benefit packages. Plus, the employer is also responsible for things, like:
- withholding state and federal income and payroll taxes from an employee’s wages;
- ensuring employees work under safe conditions;
- providing workers’ compensation for all eligible employees;
- paying for unemployment benefits; and, among other responsibilities,
- allowing employees to take family or medical leave in accordance with the law.
California Labor Code § 3353 states that an
“Independent contractor” means any person who renders service for a specified recompense for a specified result, under the control of his principal as to the result of his work only and not as to the means by which such result is accomplished.
Basically, this means an independent contractor is someone who is in business for him or herself. The status often gives a worker the freedom to choose:
- which projects he or she takes (and these can be projects simultaneously taken from different employers/clients);
- where he or she works;
- how the work is performed or completed;
- what the work schedule is;
- what the compensation is for the individual job/project.
This status, as such, affords the worker a lot of freedom and control over work projects. It also means they are responsible for things like:
- paying their own health insurance;
- purchasing and using their own work equipment (e.g., computers, cameras, etc.); and
- paying their own state and federal taxes.
Further, independent contracts are not entitled to workers’ compensation or unemployment benefits. Plus, they may not benefit from California’s extensive anti-discrimination laws.
So, the classification of your work status in California is important.
Employers often inaccurately classify workers as employees or independent contractors. Sometimes, the mistake is unintentional – the employer simply made a mistake due to an oversight or an inadequate understanding of the law. In other cases, the mistake is intentional. The reason is simple: classifying workers as independent contractors saves the employer lots of money in benefit packages, workers’ compensation, state disability insurance, and taxes.
In either case, if you were improperly classified as an independent contractor when you should have been classified as an employee, you may be entitled to compensation. As an independent contractor, minimum wage laws may not apply to you, but as an employee, they do.
So, for example, imagine you edit documents for a company. The company hires you as an independent contractor, but you are required to work at the company’s place of business from 9 am to 5 pm, like all other employees. The editing can sometimes be more extensive than anticipated, causing you to work more than 40 hours to meet the deadline. In doing so, however, when the amount paid to you is divided by the number of hours worked, you actually made less than minimum wage. Under these circumstances, you may have actually been improperly classified as an independent contractor when you really qualified as an employee. The company, therefore, may owe you.
Historically, workers in the following industries in the greater Los Angeles metro area have experienced the highest rates of misclassification:
- construction workers
- seasonal workers
- short-term or casual workers
- outside salespersons.
That said, misclassified workers have been reported by the State of California Employment Development Department (EDD) in every type and size of business.
There are several tests that can be applied to determine whether a worker is an employee or an independent contractor under California law.
CALIFORNIA’S ABC TEST
The ABC Test was first adopted by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903. It was then drafted into Assembly Bill 5, a bill Governor Newsom signed into law in September 2019. Under this test, a worker is an employee unless the following three elements are present:
- The worker is free from the control and direction of the hiring entity (person, business, or a government agency) with respect to work performance, both under the contract for performance and in fact;
- The worker performs work outside the usual course of the hiring company’s business; and
- The worker is customarily engaged in an independent business for the trade, occupation, or business related to the work performed for the hiring entity.
For example, a graphic designer hired by a website company is an employee unless the graphic designer:
- chooses when and how to perform his or her work;
- performs work that no one else in the company performs; and
- has his or her own company to create graphic designs.
The burden is on the hiring entity to establish that the worker is an independent contractor and not an employee. This test is mostly used to determine workers paid hourly as opposed to salaried workers.
CALIFORNIA’S MANNER & MEANS TEST
The ABC Test does not apply in all situations. There are certain industry exemptions, like for licensed professionals. When the ABC test does not apply, the Manner and Means Test may. The manner and means test determines whether or not an employment relationship has been created. An employment relationship exists when an entity (a person, a business or organization, or a government agency) hires a person to perform a benefit or service. The existence of an employment relationship is determined by the amount of control the hiring entity has over the hired person.
The more the hiring entity is able to control the means of the task and not simply the result of the task, the more likely there is an employment relationship and the hired person is an employee.
Other questions that will be considered apart from the amount of control are:
- Is the hired person supervised? Independent workers can do their work how they wish while employees are often supervised.
- Is the work outside the business’s normal trade? Does the hired person perform tasks that no one else performs? If so, then the worker may be an independent contractor. If there are other persons performing the same test, then the worker is likely an employee.
- Does the worker have a separate business? If the worker performs the same work for other businesses, then he or she may be an independent contractor.
- Does the worker make decisions related to the business? When a worker makes his or her own business decision about how, what, where, when, and why, the worker may be best classified as an independent contractor.
- Does the worker provide his or her own equipment? If the worker uses a personal computer, the worker may be an independent contractor.
- How is the worker paid? Employees are paid a fixed salary or hourly wage while independent contractors are often paid per project.
- Can the hiring entity terminate the worker at any time? Usually, independent contractors cannot be fired at will like employees can because they have contracts that outline termination.
There are other questions that should be considered, too, but these queries are all secondary to the question of control.
To better understand independent contractor versus employee for licensed professionals, consider an attorney who has his own law office named after him versus an attorney who provides his legal services to a large law firm.
- In the first situation, the attorney may be hired by a company to review legal documents that no one else in the company does, and this attorney does it according to his own schedule and practice. This attorney would be classified as an independent contractor.
- In the second scenario, an attorney may review legal documents as part of his or her task, but the attorney does so in a business that provides legal services and the law firm sets out when, where, and how the attorney will perform the task. As such, this attorney is an employee.
To note, though this method is often used for licensed professionals, licensed contractors are presumed by the State of California to be employees.
California’s Test Under Anti-Discrimination Laws
It is important to know that independent contractors are not protected by California’s anti-discrimination laws. California’s Fair Employment and Housing Act (FEHA), however, protects independent contractors against workplace harassment.
FEHA provides its own definition of an independent contractor at § 12940, subd. (j)(5). The test under FEHA is largely similar to the Manner and Means test with the exception that this test places a stronger emphasis on the skills and business independence of the worker.
When a business misclassifies a worker, it faces both state and federal consequences in the form of:
- back payments – the employer owes the employee payment for any underpaid work
- unpaid wage penalties – the employer must pay an employee timely or else can be fined a $100 penalty for each time the employer fails to pay all wages or a $200 penalty for willful or intentional untimely payment in addition to a 25% of the amount illegally withheld
- waiting time penalties – the employer can be fined when it willfully fails to pay final wage in full or on time upon the end of employment
- wage statement penalty – an employer can be fined $250 per employee for violating California Labor Code § 226 & § 2699 when it fails, for example, to provide itemized wage statements to independent contractors; subsequent violations result in $1,000 fines
- interest – the employer must pay interest accruing any amounts owed to an employee who was misclassified
- website notice – in California, an employer may have to provide a notice on its website stating it violated the law by misclassifying employees
- attorney fees and court costs – the employer may have to pay the employee’s attorney fees and court costs
- IRS penalties – if the IRS determines the independent contractor should have been an employee, it can impose a monetary penalty
- criminal penalties – depending on the intention and nature of the misclassification (e.g., if the employer misclassified to void taxes), criminal charges could be imposed and that could expose the employer to a fine of up to $100,000 and up to five years in prison
- damages for retaliation – if the employee was wrongfully retaliated against (e.g., wrongfully terminated) for reporting the misclassification, the employee may file a lawsuit for monetary damages.
The consequence for the misclassified employee is simple: you could have been paid less than what you were owed. To remedy this problem, you can:
- First, try to resolve the misclassification with your employer;
- Second, file an unemployment claim if you were fired, laid off, or terminated;
- Third, contact the IRS about the misclassification and taxes;
- Fourth, file a wage claim; and
- Fifth – though for some of you, you may want to do this first – contact an employment law attorney in Los Angeles who can help you understand your rights, your options, and your plan of action.
Contact An Experienced Employment Law Attorney In Los Angeles Today If An Employer Misclassified Your Work Status
Being misclassified as an independent contractor versus an employee can be to the worker’s detriment while it benefits the company. Whether the misclassification was intentional or not, you have a right to be compensated. Contact Sirmabekian Law Firm online or at 818-473-5003 to learn more about rights and options specific to your case.
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