Most workers have a right to be treated like an employee instead of an independent contractor and are presumed to be an employee. For the worker, there is a major difference between employee status and independent contractor status. For the company, there is also a huge difference. This long list of differences is the reason that many companies improperly classify or misclassify workers as independent contractors: it saves companies large amounts of money. Some estimate that converting an independent contractor to an employee will cost the company about 20% to 25% more. The actual number depends on the specific situation.
With respect to employees, companies are required to pay a portion of the employee’s taxes through withholding of wages. In addition, companies must provide worker’s compensation insurance, overtime pay, meal breaks, detailed payroll records and more. Bottom line—it’s much cheaper for companies to treat workers as independent contractors than as employees. Accordingly, lawsuits for “misclassification” are very valuable because the difference between an employee and an independent contractor is so great. When a worker sues and convinces the Judge or Jury that he should have the rights of an employee, many other claims are virtually certain to also be successful because the other claim is automatically triggered. These are called “derivative claims” because the other claim derives from the primary misclassification claim.
For instance, companies in California are required to maintain timekeeping records of, among other things, when employees were working and when they take meal periods. This requirement does not apply to independent contractors; thus, companies generally do not keep timekeeping records for independent contractors. As a result, if a worker prevails in his argument that he was misclassified as an independent contractor that he means the employee should have been treated like an employee whose time working is recorded. Such an employee will likely also prevail in a claim about failure to keep timekeeping records because the company probably does not have such records for the periods the company treated the worker as an independent contractor.
Many other claims and penalties are triggered immediately when the judge or jury determines that misclassification has occurred. Often a finding of misclassification as an independent contractor triggers penalties for failing to provide meal breaks, failing to provide rest breaks, failing to provide compliant wage statements, and failing to pay final wages on time if the worker no longer performs services for the company.
California Labor Code § 226.8(a)(1) states, in relevant part, that, “It is unlawful for any person or employer to willfully misclassify an individual as an independent contractor.” California Labor Code § 226.8(i)(4) states, in relevant part, that “‘Willful misclassification’ means avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.”
California Labor Code § 226.8(b) states, in relevant part, that, “If a person or employer has willfully misclassified an individual as an independent contractor, the person or employer shall be subject to a civil penalty of not less than five thousand dollars ($5,000) and not more than fifteen thousand dollars ($15,000) for each violation, in addition to any other penalties or fines permitted by law.”
California Labor Code § 226.8(c) states, in relevant part, that, “If the person or employer has engaged in or is engaging in a pattern or practice willfully misclassifying individuals as independent contractors, the person or employer shall be subject to a civil penalty of not less than ten thousand dollars ($10,000) and not more than twenty-five thousand dollars ($25,000) for each violation, in addition to any other penalties or fines permitted by law.”
The California Supreme Court has explained that the “the right to control work details is the most important or most significant consideration.” Ruiz v. Affinity Logistics Corp., 754 F.3d 1093, 1100 (9th Cir. 2014) (quoting S. G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341, 350 (1989)); see also Estrada v. FedEx Ground Package Sys., 154 Cal. App. 4th 1 (2007) (“The essence of the test is the ‘control of details’ -- that is, whether the principal has the right to control the manner and means by which the worker accomplishes the work.”). The Borello Court identified several secondary factors which are also considered by courts, namely, “(1) whether there is a right to fire at will without cause; (2) whether the one performing services is engaged in a distinct occupation or business; (3) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (4) the skill required in the particular occupation; (5) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (6) the length of time for which the services are to be performed; (7) the method of payment, whether by the time or by the job; (8) whether or not the work is a part of the regular business of the principal; (9) whether or not the parties believe they are creating an employer-employee relationship; (10) whether the classification of independent contractor is bona fide and not a subterfuge to avoid employee status; (11) the hiree’s degree of investment other than personal service in his or her own business and whether the hiree holds himself or herself out to be in business with an independent business license; (12) whether the hiree has employees; (13) the hiree’s opportunity for profit or loss depending on his or her managerial skill; and (14) whether the service rendered is an integral part of the alleged employer’s business.” Sotelo v. Medianews Group, Inc., 207 Cal. App. 4th 639, 656-657 (2012).
The rules regarding classifying a worker as an employee versus an independent contractor can be tricky to navigate. The central factor to determine whether someone was misclassified as an independent contractor is whether the company has the right to control how the worker performs work. For instance, if a worker can choose to work when he wants, where he wants, and how he wants, the worker may be a valid independent contractor. If a company hires an electrician to fix a faulty circuit breaker panel, the company generally cannot dictate how the electrician conducts the repair. However, a worker at the same company who has a designated schedule, must report to the company’s physical location week-after-week, and must follow detailed instructions regarding how to perform a task is more likely to qualify to be treated as an employee; if this worker is treated as an independent contractor, he likely has a claim that he was misclassified as an independent contractor.