Employee Misclassification in California: Issues and Strategies
By Robert A. Bleicher, Carr McClellan P.C.
Uber’s $100 million class action settlement with drivers who claimed they were misclassified as independent contractors rather than employees caught the attention of businesses across California. That attention is warranted. Recent decisions by courts and government agencies are clear that labeling a worker an “independent contractor” is immaterial.
Instead, courts and regulators look behind the designation to assess the extent of the company’s right to control the worker. While personnel and cost savings by hiring an independent contractor can be substantial, the expenses from misclassification can be far greater. The following is a brief summary of factors a business should consider and implement to reduce its misclassification risk.
California’s Labor Code presumes that a worker is an employee. To assess whether a worker is truly an independent contractor, the California Supreme Court in Ayala v. Antelope Valley Newspapers, Inc. instructed, “[t]he principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired . . . what matters . . . is not how much control a hirer exercises but how much control the hirer retains the right to exercise.” When evaluating control, the IRS considers the following:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
The California Department of Labor further amplifies the independent contractor factors at www.dir.ca.gov.
The consequences from misclassification can be significant. They can include liability for years of unpaid tax withholdings, unpaid Social Security and Medicare contributions, unpaid workers compensation and unemployment insurance premiums, unpaid overtime, minimum wages, and workrelated expenses. Reclassification as an employee can also lead to significant waiting time penalties, wage statement penalties, meal and rest break penalties, Private Attorney General Act penalties, and significant statutory penalties under Labor Code § 226.8(a). And, a class action that successfully alleges misclassification can increase those costs by many times more.
With those exposures in mind, the following are pro-active steps businesses should take to minimize employee misclassification risks:
- Review contracts to eliminate provisions that give the company the right to control the methods and means of accomplishing the work.
- Review the contractor’s actual activities: who in fact controls the methods and means of performance.
- Evaluate whether the worker is truly in business for him or herself or whether the worker is economically dependent on the employer.
- Check the duration of the contract— an independent contractor engagement is usually limited.
- Consider adding mandatory arbitration and class action waiver provisions in employment and consulting agreements.
Proper worker classification is a critical risk management process. That assessment should be part of implementing sound employment practices for your client’s business.
Published: July 2016 l Photo: Colourbox.de - Roman Babakin