Are you a regular employee, in that you have to punch a clock, have a boss, and work by company rules, but you are being paid as a 1099 contractor? You might be a victim of misclassification. Misclassifying employees as independent contractors is an oversight in California and a grave labor law violation that deprives you of your legal rights to minimum wage, overtime pay, rest breaks, unemployment benefits, and workers' compensation coverage.

Labor laws in the state are highly favorable to workers, particularly with Assembly Bill 5 (AB 5), which codified the stringent ABC test to define whether a worker is an employee or an independent contractor. The stakes are high for workers and employers. The first step in safeguarding your rights is to know your classification status.

Do you think you are misclassified? Call Stop Unpaid Wages in California now to get a free consultation.

The Legal Standards of Worker Classification in California

ABC Test Under AB 5

California is one of the most protective states regarding labor laws, and worker classification is no exception. In 2019, the legal landscape changed with Assembly Bill 5 (AB 5) passing, which created a presumption that most workers are employees rather than independent contractors. This assumption is key to the current enforcement of California Labor Code Section 2775.

  • California Labor Code Section 2775

Section 2775 of the Labor Code provides that anyone who offers labor or services is an employee unless the employer can demonstrate otherwise using the ABC test. This law ensures employers do not evade their responsibilities towards employees by declaring them independent contractors.

  • The Three-Pronged ABC Test

Employers should demonstrate all three prongs of the ABC test to beat the presumption of employment:

  1. The employee is not subject to the control and direction of the entity hiring them, whether in the contract or in practice. You are not independent if you have to report at certain hours, receive established instructions, or work under supervision.

  2. The work done is not within the regular business line of the hiring entity. For example, a bakery that hires a plumber to fix a pipe likely passes this test. However, if that same bakery hires a cake decorator to work on its products, it would likely fail this test, as that work is central to its business.

  3. The employee is involved in a trade, occupation, or business independently. You are your boss, serving other customers and promoting yourself.

The inability to satisfy these requirements implies that the worker should be treated as an employee, not a 1099 contractor.

  • Industries that Continue to Apply the Borello Test

Although the ABC test has become widely applied, some occupations are still exempt, which are still determined under the older Borello test, which applies a multi-factor test of control and economic reality.

Such exempted positions are:

  • Licensed practitioners like doctors, lawyers, engineers, and private investigators

  • Barbers and manicurists, as long as they fulfill specific requirements

  • Some marketing and human resource experts, provided they meet specific criteria such as having their own business, possessing advanced degrees, and negotiating their rates.

  • Other employees in strictly circumscribed statutory exemptions

Federal Law vs. California Law

The California law is not the sole legal criterion regarding the classification of workers. Federal law, especially under the Fair Labor Standards Act (FLSA), is also involved, but with a different method.

  • Overview of FLSA Multi-Factor Test

The FLSA employs a multifactor test, unlike the California bright-line ABC test, which takes into consideration:

  • The level of control that the employer exerts over the worker

  • The chance of the worker to gain or lose

  • The level of investment of the worker in equipment or materials

  • The longevity of the working relationship

  • Whether the service provided is part and parcel of the business

  • The level of autonomous business activity

There is no single determinant of status under federal law. It is the totality of the circumstances that matters.

  • Comparison with the California ABC Test

Although the FLSA test is adaptable and subjective, the California ABC test is rigid and inclined towards the employee classification. Employers must satisfy all three prongs of the ABC test. Under the FLSA, courts consider various factors.

Consequently, a worker may be an independent contractor under federal law. Still, a worker might be an independent contractor under federal law but an employee under California law. The more protective California law will apply to claims regarding state-level protections, like overtime and meal breaks.

Typical Examples and Signs of Misclassification

Common Misclassification Cases

Misclassification isn't always obvious, but is particularly common in specific industries. Here are real-world examples where workers are often misclassified as independent contractors despite their roles functioning like employees:

  • The construction workers who have to take a supervisor's orders, use the company's tools, and work at specific hours at the workplace are frequently misclassified. Although paid as 1099 contractors, their working conditions are similar to those of employees.

  • Salon stylists who must work fixed hours, adhere to salon policies, utilize the scheduling program of the business, and be referred clients by the salon can also be misclassified when they sign independent contractor agreements.

  • App-based delivery drivers are often the subject of misclassification claims. When they are required to wear company logos, have to take prescribed routes or delivery schedules, and cannot refuse work without repercussion, they can be considered employees under the law.

All these scenarios amount to a degree of direction, control, or incorporation into the core business, which nullifies the argument of actual independence under the ABC test in California.

Red Flags You Might Be Misclassified

Although you may have entered into a 1099 agreement, there are workplace realities that can indicate that you are an employee under California law. The red flags include:

  • You have a company uniform, a company car, or you use tools provided by the employer. These indicators of operational control do not usually apply to independent contractors.

  • The hiring party determines your schedule, break times, and work process. Real independent contractors choose how, when, and where to work.

  • You do not issue invoices or keep separate business records. Independent contractors run their businesses and bill customers for the services provided.

  • You work in the same capacity as ordinary W-2 workers. You can be misclassified when you do the same work and are treated differently regarding classification and benefits.

Early detection of these signs may enable you to demand your rights and even get back unpaid wages, overtime, and other benefits you are entitled to as an employee under California law.

Misclassification Problems in the Industry

Gig Economy Workers

Whether you drive with Uber, deliver with DoorDash, or shop with Instacart, you have probably heard about the current debate over the status of gig workers. These firms have been claiming that their employees are independent contractors and not employees. Why? Since it will save them millions of dollars in benefits, taxes, and labor costs.

However, the California Assembly Bill 5 (AB 5) questioned this model. The legislation mandates gig employers to use the ABC test, and most app-based drivers fail to satisfy all three components, particularly the need for their services to be beyond the normal scope of the company's business.

In response, Uber, Lyft, and others supported Proposition 22, which exempted app-based transportation and delivery drivers under AB 5. Nevertheless, there are still legal challenges. The California courts have since declared some of the provisions of Prop 22 unconstitutional, and the status of workers is constantly reviewed. If you are a gig economy worker, you might be eligible for back wages, overtime, and reimbursement of expenses if you have been misclassified.

Construction & Trade Industries

One of the most commonly cited industries in misclassification is construction. Why? Contractors will hire independent workers to evade taxes, workers' compensation, and overtime pay.

Many of these workers are supplied with tools by the general contractor, work regular hours at the job site, and are given strict instructions by a supervisor. That is not independent; that is an employer-employee relationship under the California labor laws.

Even worse, misclassification is frequently achieved via subcontracting tiers, with big companies distancing themselves from wage infringement. The California Labor Commissioner and DLSE have been clamping down on these practices, particularly in large infrastructure projects, residential construction, and public works.

Healthcare Professionals

Misclassification not only applies to delivery drivers and business people. Nurses, home health aides, and medical technicians are increasingly classified as independent contractors, even though they do critical, routine work under direct supervision in hospitals and clinics.

Most of these caregivers are assigned to work specific shifts, instructed on how to do the job, and cannot subcontract their work or work with other clients. That renders them employees rather than contractors under California and federal law.

Employers in the healthcare industry may defend misclassification based on staffing needs or third-party agencies, but courts have rejected this argument when employees act as traditional W-2 employees.

Tech and Creative Freelancers

California has also been scrutinized for its growing digital economy. App developers, coders, UX designers, writers, photographers, and video editors are commonly categorized as freelancers, even when working on long-term, integral work with one company.

AB 5 and its amendments, particularly AB 2257, attempted to mitigate this by creating exemptions. For example, freelance writers, photographers, and video editors may be exempt from the ABC test if they satisfy several conditions, such as maintaining a separate business location, having tools, and negotiating their rates. The previous controversial limit on the number of submissions per client was removed.

Nevertheless, numerous technology and media firms are playing fast and loose, stretching the limit to evade payroll taxes and benefits. You may be misclassified as a freelancer when you are doing regular work with the same client and under their control.

Legal and Financial Implications of Misclassification

Employer Penalties

Misclassifying employees as independent contractors is not a harmless bookkeeping mistake but a potentially costly legal and financial liability to the employer under California and federal law.

  • Civil and Criminal Penalties

In case of misclassification of a worker, employers can be liable to:

  • Minimum wage back pay, rest and meal break back pay, and overtime pay.

  • Fines and interest on non-compliance with wage and hour laws.

  • Fines between $5,000 and $25,000 per violation if the misclassification was willful.

At the federal level, the punishment is increased. Employers can be held responsible:

  • The employer's entire FICA (Social Security and Medicare) contributions.

  • The unpaid FICA share of the employee, even when the employer did not withhold it, is 40 percent.

  • Further fines and interest on all outstanding balances.

  • Fines of up to $1,000 per misclassified employee and up to one year in prison for willful fraud.

The monetary cost may escalate rapidly, particularly when the misclassification involves more than one employee or spans several years.

  • Class Action Lawsuit Risk

Misclassified employees tend to unite and bring wage and hour class action suits. If the group can demonstrate that the employer had a consistent policy of misclassification, they can be awarded unpaid wages, penalties, and legal fees, which can run into millions of dollars in damages.

  • Public Exposure for Port Trucking Companies

The risks are not limited to lawsuits in industries like trucking. California has a publicly available list of port drayage companies that misclassify drivers and do not pay labor judgments. This publicity is a caution to the customers (including large retailers) who can be subjected to joint and several liability in case they still deal with the offending company.

The Triggering of Audits by Misclassification

Misclassifying workers may cause audits and investigations by California's Employment Development Department (EDD), the Labor Commissioner, or the IRS. These studies are usually triggered by:

  • A 1099 employee who applied for unemployment disclosed that no employer contributions were made.

  • Whistleblower reports or employee complaints.

  • The submission of IRS Form SS-8 enables employees to seek a ruling on their status.

In other instances, government agencies can flag employers through algorithmic detection of payment patterns, failure to file W-2s, or industry trends.

After an audit is initiated, employers are usually expected to submit contracts, payroll records, tax documents, and messages regarding work responsibilities and requirements. In case of misclassification, retroactive taxes, fines, and back payments may be imposed, not to mention civil court exposure.

Remedies and Worker Protections

California law provides robust protection to employees who are misclassified as independent contractors. You might have a right to substantial compensation when you find yourself in this situation. Legal protections ensure you have the right to claim without fear of retaliation.

Filing a Claim

In case you feel that you have been misclassified, there are many ways through which you can seek legal redress:

  • California Labor Commissioner (DLSE): File a wage claim against unpaid wages, overtime, or missed breaks. This is usually the shortest path to regain lost compensation under California law.

  • Employment Development Department (EDD): Report your employer if they did not pay unemployment insurance or did not pay taxes correctly.

  • IRS: File Form SS-8 to ask the IRS to determine whether you are an employee or an independent contractor, or Form 8919 to report unpaid Social Security and Medicare taxes because of misclassification.

The various agencies deal with multiple elements of the misclassification problem. In certain situations, you may seek redress in more than one avenue.

Damages that Workers can Claim

California misclassified workers can recover:

  • Unpaid salaries and overtime that would have been earned under the protection of employees.

  • Penalties for meal and rest breaks—typically one hour at the regular pay rate per missed break.

  • Liquidated damages may be twice the amount of unpaid wages in case of bad faith offenses.

  • Interest on all amounts not paid.

  • Legal expenses, especially in class action or individual lawsuits.

Such remedies may be sought individually or as a group claim.

Misclassification claims have legal deadlines:

  • Most wage and hour violations (e.g., unpaid wages, missed breaks) have a three (3)-year statute of limitations.

  • Four (4) years if you have a breached written employment contract.

Missing these deadlines may cost you your right to collect what you are owed.

Anti-Retaliation Protections

The California law explicitly prevents employers from retaliating against employees who report misclassification or wage claims.  This comprises any type of:

  • Demotion

  • Discipline

  • Harassment

  • Termination

There are other sanctions that an employer who retaliates may incur, such as reinstatement and back pay.

If you are fired because you were exercising your legal rights, you can claim wrongful termination. This may lead to:

  • Reinstatement

  • Lost wages and benefits

  • Punitive damages

The law is on your side. You have a right to sue and be shielded when you are misclassified.

Preventing Misclassification Errors

It is in the interest of employers and workers to avoid the problem of misclassification. Proactive behavior can eliminate expensive lawsuits, audits, and wage claims in the future.

For Employers

To minimize the chances of legal liability and to comply with California law, employers are advised to:

  • Revisit Internal Policies and Contractor Roles

  • Begin by auditing your workforce. Thoughtfully consider the classification of workers as independent contractors and whether their positions pass the ABC test:

  • Do you not control and direct them?

  • Are they not in your primary business?

  • Do they practice their trade or profession?

Otherwise, they should be treated as employees.

Ensure that all independent contractor agreements are in line with the actual work. Nevertheless, keep in mind: no contract can supersede the law. A contract saying that a person is a contractor will not cover you when their work is more like an employee's.

Nevertheless, properly written contracts may assist in setting expectations and minimizing misunderstandings, especially when they are consistent with the legal definition of independence.

Keep records that indicate:

  • Have a business license or entity of their own

  • Advertise their services publicly

  • Serves several clients

  • They offer their equipment and charge their prices

This evidence supports a valid classification of contractors in case of a challenge.

For Workers

If you are a contractor and have been hired, guard yourself by knowing your rights and maintaining good records. The fact that you signed an agreement that you are an independent contractor does not make the classification legal. The California law considers the true nature of your work and not what the paperwork indicates.

You have a right to reclassification and compensation if your work is supervised, scheduled, or controlled like an employee.

Keep good records of your workplace, including:

  • Timesheets or calendars of your working hours

  • Supervision or instruction emails or messages

  • Pay stubs or payments indicating hourly wages

The employer provided the equipment or tools as evidence.

Such records will help you when you have to make a misclassification complaint.

Frequently Asked Questions (FAQs)

What is 1099 misclassification?

The 1099 misclassification is when an employer classifies a worker as an independent contractor (who is supposed to receive a 1099 tax form) rather than an employee (who should receive a W-2). This may deny employees such vital rights as minimum wage, overtime, meal/rest breaks, unemployment benefits, and workers' compensation.

What should I do to know if I'm misclassified?

You can be misclassified when:

  • Your boss dictates your time or your way of working

  • You wear company uniforms, equipment, or tools

  • You are paid by the hour or not invoiced

  • You work on tasks that are core to the business of the company

  • Employees are other workers who do the same job

What is the ABC test in California?

The ABC test is a set of rules codified in California Labor Code Section 2775 to define whether a worker is an independent contractor. A worker is deemed an employee unless the hiring party can show:

  • The employee is not under control

  • The labor is not in the normal course of business

  • The employee is involved in a business that they have set up on their own

Is there an ABC test exception?

Yes. Some occupations, including doctors, lawyers, engineers, and beauty practitioners, can remain subject to the older Borello test, which employs a multi-factor test to determine classification.

Find an Employment Lawyer Near Me

The practice of misclassifying employees as independent contractors is not merely a clerical mistake but a crime that deprives workers of their pay and rights. Strict AB 5 and the ABC test were created in California to prevent this practice and defend your rights. Have you been denied overtime, meal breaks, or minimum wage because you were classified as a 1099 contractor? You might have a case, and you might be entitled to money.

It is important to remember that California law considers the reality of your working relationship, whether you signed a contract that referred to you as a contractor. When your boss dictated your hours, provided equipment, or treated you as an ordinary employee, the law probably considers you as such and grants you all the rights this status entails.

Confused about your job category? Call Stop Unpaid Wages now. Our California team will go over your case and explain to you what your rights are under state and federal law. Wait no more; your filing time might be running out, so call us now at 424-781-8411.