Independent Contractor vs. Employee Classification in California: What Employers Need to Know

Employers must correctly classify workers as independent contractors (ICs) or employees when hiring. Simply calling someone an IC does not make them one in the legal sense. Specific legal requirements must be met for someone to be considered an IC. As an employer, you must understand what makes a worker an independent contractor. Misclassifying a worker can result in harsh penalties. In this article, we discuss the difference between an independent contractor and an employee, employee misclassification, and the penalties employers can face for employee misclassification in California.

Difference Between an Independent Contractor and an Employee

Some employers think that someone can be classified as an IC by signing an agreement to be one or by working outside the employer’s normal place of business. This is inaccurate. California has strict laws that determine whether a worker is an independent contractor. These laws are primarily governed by Assembly Bill No. 5 (AB 5). AB 5 uses a strict three-part “ABC test” to determine whether an individual is an IC or an employee. Under this test, a worker is considered an employee, unless you can prove all of the following;

• A: You do not control or direct the individual’s work
• B: The individual does work that is different from the usual course of your entity’s business
• C: The worker is usually involved in an independent trade, occupation, or business that is similar in nature to the work being done.

Employee Misclassification

Employee misclassification arises when an employer incorrectly classifies an employee as an independent contractor. Some employers do this to avoid legal obligations such as paying payroll taxes, providing benefits like insurance, and complying with wage laws. However, some simply don’t understand how to classify workers accurately. Regardless of whether misclassification is deliberate or unintentional, it is a violation of the law and can have serious consequences.

Penalties for Misclassifying Workers in California

In California, independent contractors do not have the same legal protections that employees have regarding wages, benefits, and many other things. Misclassifying an employee may mean, for example, that the person will be paid less than the minimum wage, will not receive overtime pay, or will not be eligible for workers’ compensation in the event of a work-related injury. Additionally, misclassifying workers may result in an employer not complying with their tax obligations.

Possible penalties for employee misclassification in California include the following;

• Back wages, such as unpaid overtime, minimum wage differences, and benefits the employee would have been eligible for.
• Payroll tax liabilities
• Civil penalties in the thousands
• Legal fees and costs if misclassification results in litigation
• Criminal penalties in severe cases involving tax evasion or intentional fraud

Steps to Take to Avoid Employee Misclassification

To avoid employee misclassification and thus, the harsh penalties associated with it, take the following steps;

• Consult with an employment law attorney before classifying workers
• Conduct a regular and thorough review of worker classification to ensure compliance
• Stay informed about changes in employment law, as classification laws evolve over time

Contact a Qualified Employment Attorney

If you need help ensuring proper classification of your workers, contact a qualified employment attorney at SAC Attorneys LLP today.