Independent Contractor Misclassification: Know Your Rights

What Is Independent Contractor Misclassification?

Independent contractor misclassification occurs when an employer classifies a worker as an independent contractor rather than an employee, despite the worker meeting the legal definition of an employee. This is often done to avoid legal obligations and save on labor costs. The California Supreme Court established the ABC test in the Dynamex decision [ Dynamex Operations West, Inc. v. Superior Court of Los Angeles County (2018) 4 Cal.5th 903.], which presumes workers are employees unless the employer can establish three elements:

1. The worker is free from 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;
2. The worker performs work that is outside the usual course of the hiring entity’s business; and
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

Ask yourself these questions:

• Are you free from the control and direction of your employer in connection with the performance of your work Does the contract state so?
  • In determining the control exercised by your employer, you may consider how much control the your employer has the right to exercise.
  • “Regarding the right-to-control test, ‘what matters under the common law is not how much control a hirer exercises, but how much control the hirer retains the right to exercise.’”) Espejo v. Copley Press, Inc. (2017) 13 Cal. App. 5th 329, 343.
• Do you perform work that is outside the usual course of your employer’s business?
• Are you also engaged in an independently established trade, occupation or business of the same nature as the work you perform for the employer?

Common Industries And Jobs Affected

Independent contractor misclassification is a common problem in industries such as construction, transportation and the gig economy. Workers in these industries may be misclassified as independent contractors even though they perform work that is integral to the employer’s business. There are several occupations that are often misclassified as independent contractors when they should be classified as employees. Some common examples include:

• Gig economy workers such as rideshare drivers, delivery drivers and food delivery drivers. These workers are often classified as independent contractors, even though they perform work that is integral to the business and are subject to significant control by the companies they work for.
• Construction workers such as carpenters, electricians and plumbers. These workers are often misclassified as independent contractors, even though they are subject to significant control by the companies they work for and perform work that is integral to the business.
• Health care workers such as nurses, physical therapists and home health aides. These workers are often classified as independent contractors, even though they perform work that is integral to the business and are subject to significant control by the companies they work for.
• Technology workers such as programmers, software developers and IT consultants. These workers are often misclassified as independent contractors, even though they may work full time for a single company and are subject to significant control by the companies they work for.
• Creative professionals such as writers, photographers and graphic designers. These workers are often classified as independent contractors, even though they may work exclusively for a single company and are subject to significant control by the companies they work for.
• Security guards are often hired by private security firms and assigned to work at specific locations or events. They may be provided with uniforms, equipment, and training by the security company, and are typically subject to significant control and supervision by their employer. As such, security guards are generally considered employees under most state and federal labor laws.
• Similarly, fugitive recovery agents (also known as bounty hunters) are often hired by bail bond companies to track down and apprehend individuals who have skipped bail. They may be provided with equipment, training, and other resources by the bail bond company, and are typically subject to significant control and supervision by their employer. As such, they are also generally considered employees under most state and federal labor laws.
• On-site property managers are often classified as employees of the property owner or management company, and are entitled to benefits such as workers’ compensation, overtime pay, and other protections under state and federal labor laws. However, in some cases, property owners or management companies may misclassify on-site property managers as independent contractors in an attempt to avoid these legal obligations and save on labor costs.
  • On-site property managers play a critical role in overseeing the day-to-day operations of apartment complexes, farms, storage facilities and other types of properties. These managers are responsible for ensuring that the property is well-maintained, tenant or customer needs are addressed promptly, and the property is in compliance with relevant laws and regulations.
  • In the case of apartment complexes, on-site property managers are responsible for managing tenant relations, leasing apartments and collecting rent. They may also oversee maintenance staff and contractors who perform repairs and renovations, as well as handle administrative tasks such as record-keeping, budgeting, and marketing.
  • For farms, on-site property managers are responsible for managing the farm’s operations, such as overseeing the planting, harvesting, and storage of crops, managing livestock, and coordinating with suppliers and buyers. They may also be responsible for managing farm employees, performing administrative tasks such as budgeting and record-keeping, and ensuring that the farm is in compliance with environmental regulations.
  • In the case of storage facilities, on-site property managers are responsible for managing tenant relations, leasing storage units and collecting rent. They may also oversee maintenance staff and contractors who perform repairs and renovations, as well as handle administrative tasks such as record-keeping, budgeting and marketing.
  • On-site property managers must possess strong organizational, communication and problem-solving skills to manage their properties effectively. They must be able to handle tenant or customer complaints and emergencies, as well as communicate effectively with property owners, contractors, and other stakeholders. In addition, they must be knowledgeable about relevant laws and regulations and be able to ensure that the property is in compliance with them.
  • Overall, on-site property managers play a critical role in ensuring that properties are well-managed, tenants and customers are satisfied, and the property is in compliance with relevant laws and regulations. Their work is essential to the smooth operation and success of apartment complexes, farms, storage facilities, and other types of properties.
  • Misclassifying on-site property managers as independent contractors can have serious legal and financial consequences for property owners or management companies, including fines, penalties, and lawsuits. Additionally, it can be detrimental to the on-site property managers themselves, who may not have access to important benefits and protections that employees are entitled to.
  • To avoid misclassification, property owners and management companies should carefully evaluate the nature of the on-site property manager’s work and ensure that they are properly classified as employees under state and federal labor laws. This includes considering factors such as the degree of control the property owner or management company has over the on-site property manager’s work, whether the on-site property manager is performing work that is integral to the property’s business, and whether the on-site property manager is providing their own tools, equipment, or supplies.

It’s important to note that misclassifying employees as independent contractors can have serious legal and financial consequences for businesses, including fines, penalties, and lawsuits. If you’re unsure about how to classify your workers, contact me today for a consultation.

Who has the burden of proof in a misclassification case?

In misclassification cases, under the law from the AB-5 Dynamex Test, it is a common misconception that the employee bears the burden of proving they were incorrectly classified. However, the reality is that the employer must shoulder the burden of proof, particularly when distinguishing between an hourly and a salaried worker. It is the employer’s responsibility to demonstrate that their classification of a worker complies with employment laws.

What is the ABC test?

The ABC test classifies workers as an employee unless the employer can confirm three stipulations: independence from the employer’s control, performing work outside the employer’s main business and being an established independent business in the same industry.

Signs of Misclassification

If you believe you may have been misclassified as an independent contractor, there are several signs to look out for, such as:

• The employer controls your schedule, work duties or equipment
• You are required to wear a uniform or use the employer’s branding
• You are not able to work for other companies in the same industry

In California, these factors are often cited as relevant considerations in determining whether a worker is an employee or an independent contractor under the “ABC” test established by the Dynamex Operations West, Inc. v. Superior Court decision in 2018, which was later codified by Assembly Bill 5 (AB 5) in 2019. The California Supreme Court in Dynamex held that a worker is presumed to be an employee under state wage and hour laws unless the employer can satisfy all three prongs of the ABC test.

Legal Protections for Workers

Workers who have been misclassified as independent contractors have legal protections under state and federal labor laws. They may be able to file a wage and hour claim or pursue legal action against the employer to recover lost wages and other damages. The determination of whether a worker is an independent contractor or employee is fact-specific, and courts use the multifactor test established in Borello [ S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341. ] to determine whether a worker is an employee or independent contractor. Factors considered in this test include the level of control the employer has over the worker, the degree to which the worker is engaged in an independently established business, and the level of skill required to perform the work. The California Supreme Court case of Martinez v. Combs [ Martinez v. Combs, 49 Cal.4th 35 (2010). ] established that an employer’s obligation to provide its employees with the protections of California labor law does not depend on the employer’s labeling of the worker as an independent contractor. Instead, the court emphasized that the determination of whether an employment relationship exists depends on the economic realities of the working relationship.

Legal Responsibilities for Employers

Employers have legal responsibilities to properly classify workers as employees or independent contractors. Failure to do so can result in fines, penalties and lawsuits.

Benefits of Proper Classification

Properly classifying workers as employees is not only required by law, it also has many benefits for employees. Employees are entitled to important benefits and protections, such as workers’ compensation, unemployment insurance, and overtime pay.

Have I Been Misclassified?

Independent contractors are often referred to as freelancers. They include workers who typically consult for or do business with multiple clients simultaneously. Independent contractors generally will have flexibility in negotiating when, where, and how they work. However, they enjoy considerably fewer benefits than employees hired full time by a person, company or government organization. Independent contractors are not automatically entitled to:

• Overtime pay
• Paid meal breaks
• Minimum wage adherence
• Workers’ compensation
• Unemployment benefits
• Family and medical leave
• Right to sue in cases of unlawful discrimination or retaliation

Unscrupulous employers often misclassify employees as independent contractors to avoid having to provide state-mandated benefits and working conditions, including overtime, meal breaks, and workers’ compensation. You are likely an employee and not an independent contractor if:

• You are paid by the hour. Independent contractors are typically paid a flat fee for a set amount of work. Generally, only employees should be paid on an hourly basis. Additionally, if you are paid hourly, your wage must meet the minimum requirements for your locality.
• You are required to come to a certain location on a regular work schedule. Outside of a standing meeting or two, independent contractors should not be required to stick to a fixed work schedule or come into an office. If you are working a 9 to 5, chances are that you are an employee in the eyes of the law.
• You are required to follow specific instructions in completing tasks. Employers can set best practices and expectations for their employees, but they generally will not have as much oversight or control over independent contractors. If you are required to complete tasks in a certain way, you are likely an employee.
• You receive substantial training in how to do your job. In most situations, independent contractors are hired to complete a specific task that they already have experience with. If you are given on-the-job training by your employer or other employees, you are not likely to be considered an independent contractor.
• You use company tools and resources when performing your job responsibilities. Independent contractors will typically bring their own tools to a job site. If you are expected to use the company’s resources, you are probably an employee.
• You are restricted from working for other businesses. In most cases, an employer cannot mandate that an independent contractor exclusively work for their firm. Employers can restrict their employees from doing work for other companies. If you face any employment restrictions, you are most likely an employee.

Even if you voluntarily filled out and submitted a 1099 form in lieu of a W-4 form, you are not necessarily an independent contractor. Similarly, any written contractors that define the working relationship as a firm hiring an independent contractor will not generally hold up in court if there is evidence that the worker has been misclassified. Every working environment is different, and it may not be immediately obvious that you are being misclassified. If you are picking up on red flags and are not receiving basic benefits like overtime pay, it may be time for a consultation to assess your situation and determine whether you have a case.

What Are My Options If I Have Been Misclassified?

There are cases where employers genuinely misunderstood classification rules and will unintentionally misclassify employees as independent contractors. In other situations, employers will intentionally exploit workers through misclassification, as they save money by not having to pay for basic employee benefits.

No matter your employer’s intentions, you must act if you believe that you have been misclassified.

Being misclassified can result in extremely unfavorable tax implications and prevent you from collecting owed overtime pay and compensation for meal breaks. You can also find yourself in a vulnerable position should you need to collect unemployment benefits, seek workers’ compensation benefits, or take family or medical leave.

An employer cannot retaliate against you for filing a wage claim or reporting an independent contractor misclassification.

Retaliatory acts include termination, demotion, a reduction of hours or any other adverse action stemming from your exercising your rights under California law.

Misclassified employees have three years from the date of the most recent offense to pursue a civil lawsuit against their employers for cases involving unpaid wages.

If your case involves a breach of a written employment contract, you have four years to initiate legal action. Should misclassification apply to multiple workers, you may choose to file a class action lawsuit.

A successful lawsuit involving employee misclassification can help you recover the following types of compensation:

• Unpaid wages for hours paid at subminimum wage rates, plus interest
• Unpaid overtime wages, plus interest
• Unpaid wages for state-mandated meal breaks, plus interest
• Liquidated damages, plus interest, for cases where an employer acted in bad faith
• Reasonable legal fees

What is misclassification and why is it important?

To start, every worker has a classification. Employers classify every worker as either exempt or nonexempt. These classifications are quite important, because exempt workers are not entitled to overtime pay, but nonexempt workers are. One type of exempt worker is an “independent contractor.” Employers very often misclassify workers, who should be employees, as independent contractors in order to exclude those workers from overtime pay. But a worker is not an independent contractor just because the employer says so; there are specific requirements.

Federal Law – Who is an Independent Contractor?

The Fair Labor Standards Act (“FLSA”) is the federal law governing overtime pay. FLSA requires employers to pay covered employees the minimum wage. FLSA further requires employers to pay covered employees overtime pay if the covered employees work more than 40 hours in a given workweek. Whether or not an employee is covered under FLSA depends on that employee’s classification. In general, FLSA exempts “white collar” employees from overtime pay, including independent contractors. But an independent contractor is a specific type of worker and there are several factors differentiating an independent contractor from an employee:

1. An independent contractor’s work is less likely than an employee’s work to be integral to the employer’s business.
2. An independent contractor’s managerial skills are more likely than an employee’s managerial skills to affect the independent contractor’s opportunity for profit or loss.
3. An independent contractor is more likely than an employee to make some independent investment in the necessary facilities and equipment.
4. An independent contractor is more likely than an employee to exercise independent business judgment.
5. An independent contractor is more likely than an employee to have an indefinite working relationship with the employer.
6. An independent contractor is less likely than an employee to be subject to the employer’s control.

These factors are each complex and subject to scrutiny; employers often make mistakes. An experienced attorney can help determine whether or not an employer has properly applied these criteria.

California Law

In general, California law defines an independent contractor in much the same way as federal law. If a California worker disputes his or her classification, California law presumes that the worker is an employee and requires the employer to prove otherwise. California law considers factors in addition to federal law, including, but not limited to:

• Whether or not the worker is paid by salary / hourly wage or by project;
• Whether the work requires a special skill.

Consequences of Misclassification

If an employer misclassifies an employee as an independent contractor, then the employer may owe the employee compensation for unpaid overtime and missed breaks.

• Employers sometimes mistakenly or intentionally classify certain workers as independent contractors rather than employees, even though the workers qualify as employees under the law. This “misclassification” usually results in the employees being denied various benefits of employment, including overtime pay, meal breaks and reimbursement of business expenses. Indeed, the loss of such benefits is not just a by-product of misclassification, it is usually the point of misclassification. According to the National Employment Law Project, employer misclassification abuse has imposed massive costs on workers and denied state and local treasuries of hundreds of millions of dollars in lost tax revenue. The sorts of workers who are often misclassified include truck drivers, janitors, delivery drivers and home health care workers.

How do workers know whether they have been misclassified as independent contractors?

The U.S. Department of Labor has published a worksheet that describes the factors that courts generally consider under the Fair Labor Standards Act when determining whether an employment relationship exists. These include:

1. The extent to which the work performed is an integral part of the employer’s business;
2. Whether the worker’s managerial skills affect his or her opportunity for profit and loss;
3. The relative investments in facilities and equipment by the worker and the employer;
4. The worker’s skill and initiative;
5. The permanency of the worker’s relationship with the employer;
6. The nature and degree of control by the employer.

California law is more protective of workers than federal law. Under California Labor Code Section 2750.3, enacted by the Legislature in 2019, a worker is deemed to be an employee rather than an independent contractor of the hirer if any one of the following is true:

• (1) the worker is not free from the control and direction of the hirer;
• (2) the worker performs work within the usual course of the hiring entity’s business; or
• (3) the worker is not customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

Thus, for example, truck drivers or delivery persons who perform work for a delivery or transportation company are employees of the company for purposes of California wage law.

Similarly, delivery workers who only perform delivery work for a single company are deemed employees of that company despite being classified as supposed business owners.

What can workers recover if they have been misclassified?

So what can a worker who has been misclassified do about it?

In California, Labor Code Section 226.8 makes it unlawful to willfully misclassify an employee as an independent contractor. Under Section 226.8, employers can face penalties ranging from $5,000 to $15,000 for each isolated violation of the statute, or $10,000 to $25,000 for each violation of the statute if it is determined that the employer is engaging in a “pattern or practice” of misclassification.

California’s Private Attorneys General Act (PAGA) permits employees who have been misclassified to collect these penalties in a representative action on behalf of the state. Under PAGA, a successful employee acting as a private attorney general keeps 25% of the penalties collected, while 75% goes to the state.

Employees can also recover their employment-related business expenses and losses under California Labor Code Section 2802. These business expenses could include items like equipment, tools, fuel and other similar costs that should have been paid by the employer if the employer misclassified the worker as an independent contractor.

Misclassified employees may also be entitled to minimum wage and overtime compensation under California Labor Code Section 510 and Section 1194 and under 29 U.S.C. Section 201 et seq. of the Fair Labor Standards Act.

Employee Misclassification FAQ

The wave of private and federal enforcement actions points to a problem that remains widespread. Workers who believe that they have been misclassified as independent contractors should contact an experienced employment law attorney to discuss their rights and potential remedies.

Notable Case-law Precedents.

1. Dynamex Operations West, Inc. v. Superior Court of Los Angeles County, 4 Cal. 5th 903 (2018) : This case established the “ABC test” for determining worker classification in California.

Holding: The court adopted the “ABC” test for determining worker classification for claims arising under wage orders issued by the Industrial Welfare Commission (IWC).

Rule: Under the ABC test, a worker is presumed to be an employee, unless the hiring entity can prove that the worker:

• (A) 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;
• (B) performs work that is outside the usual course of the hiring entity’s business; and
• (C) is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

2. Ayala v. Antelope Valley Newspapers, Inc., 59 Cal. 4th 522 (2014): This case involved newspaper delivery carriers who were classified as independent contractors. The California Supreme Court held that the proper test for determining worker classification is the “multi-factor” or “economic realities” test, which considers a variety of factors, such as the degree of control exercised by the employer, the worker’s opportunity for profit and loss, and the skill required to perform the work.

Holding: The court held that the common law test, known as the Borello test, applied to determine whether a newspaper carrier was an independent contractor or an employee for purposes of California wage and hour law.

Rule: Under the Borello test, the most important factor in determining whether a worker is an employee or independent contractor is the degree of control the hiring entity has over the worker’s performance of the work. Other factors considered include:

• (A) whether the worker is engaged in a distinct occupation or business;
• (B) the kind of occupation, with reference to whether, in the locality, the work is usually done under the hiring entity’s direction or by a specialist without supervision;
• (C) the skill required in the particular occupation;
• (D) whether the hiring entity or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;
• (E) the length of time for which the services are to be performed;
• (F) the method of payment, whether by the time or by the job;
• (G) whether or not the work is a part of the regular business of the hiring entity; and
• (H) whether or not the parties believe they are creating the relationship of employer-employee.

3. Vasquez v. Jan-Pro Franchising International, Inc., 923 F.3d 575 (9th Cir. 2019): This case involved janitorial workers who were classified as independent contractors by a franchiser. The Ninth Circuit Court of Appeals held that the “ABC test” established in Dynamex should be applied retroactively to cases that were pending or on appeal at the time of the Dynamex decision.

Holding: The court held that the ABC test from Dynamex applied retroactively to wage claims brought under the California Labor Code, not just to wage order claims.

Rule: Same as Dynamex: The Vasquez court held that the ABC test applied retroactively to wage claims brought under the California Labor Code, whereas Dynamex only applied the test to claims arising under wage orders issued by the Industrial Welfare Commission.

4. S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989): This case established the “Borello test” for determining worker classification in California. Under this test, the primary consideration is whether the employer has the right to control the manner and means of accomplishing the result desired, regardless of whether that right is exercised. Other factors that may be considered include the degree of skill required to perform the work, the method of payment, and the provision of tools and equipment.

Holding: The court set forth the multifactor Borello test as the primary means of determining whether a worker is an independent contractor or an employee for purposes of California wage and hour law.

Rule: Same as Ayala: Borello established the multifactor test that looks at several factors, including the degree of control the hiring entity has over the worker’s performance, while Ayala affirmed that the Borello test was the appropriate one to use in determining worker classification.

Each of these cases has contributed to the ongoing debate and evolution of worker classification standards in California. Employers should be aware of the tests and factors used in these cases to ensure proper classification of their workers and compliance with state and federal labor laws.

How I Can Help.

The independent contractor misclassification is one of the most common employer classification errors. Because, both California and federal law require a complex factual determination to determine whether a worker is an independent contractor, employees and employers alike can be confused.

But a knowledgeable attorney can help. If you believe your employer has improperly classified you as an independent contractor, I have extensive experience helping workers who have been misclassified as independent contractors. I can help you understand your legal rights, negotiate with your employer and represent you in court if necessary.

If you believe you have been misclassified as an independent contractor or have questions about your legal rights and responsibilities, contact me today for a consultation.