Many businesses often choose to hire contractors instead of full-time employees in a bid to save more money and improve their bottom line. Independent works are paid by companies to work on temporary projects and provide services such as consulting, but they’re not considered employees. An independent company may work for a given company for years and years, but the line between employees and contractors can blur. Many people don’t really understand the difference between being an independent contractor and being an employee because in many cases, there seems to be no difference. Often employees and independent contractors work at the same company and in some cases, they do the same job.
One of the most common mistakes that employers make is misclassifying workers as independent contractors when they should be employees. While some employers may genuinely misclassify workers because they lack a proper understanding of the law, others intentionally do so to avoid legal obligations. Companies have a lot more gray areas that they can take advantage of when retaining the services of independent contractors. In some cases, they also get some leg room when it comes to issues of employment taxes. However, independent contractors and individuals who are self-employed should conduct a careful review of their relationships and also keep in mind the special legal and tax considerations so as to understand the distinctions.
When workers are misclassified as independent contractors, they miss out on various rights and benefits they’re entitled to as employees. This may include minimum wage, meal periods and rest breaks, paid overtime, penalties and interests, and other similar rights entitled to employees. Change of job title may also affect liability and tax implications. You may have a wage and hour claim if you regularly work more than 40 hours a week or eight hours in a day but you don’t get any overtime payments because you’re considered to be an independent contractor.
Get in touch with the attorneys at Stop Unpaid Wages for a free evaluation of your case. Our experienced attorneys will help you understand your legal options and are committed to fighting for employment law rights of California employees. We can help you file a lawsuit against your employer and recover any wages to which you’re entitled. Contact us now at 424-781-8411 or fill out our consultation form to get legal help.
Key Differences between Employees and Independent Contractors
Typically, a contractor is an individual who’s in business for him/herself. They usually offer certain services and skills that are not part of a company’s regular business. They also set their own hours, fees, work from their own place of business or home, provide services to more than one customer or client, decide when and how to go about accomplishing tasks, provide their own tools and equipment, and incur the costs associated with performing the job. A client may provide deadlines and specifications for the work but the contractor will determine how best to do the job and how much time to spend. For instance, a fashion designer who works from home sets his or her own hours, creates products for multiple customers, and gets paid on per project would most likely be categorized as an independent contractor.
Conversely, an employee is an individual who usually works for only one employer and whom a company has much control over. They typically perform work that is part of the regular business of the company. Employees work at the employer’s place of business, work within the hours set by the employer, have regularly scheduled hours, receive training and direction from the company, are subject to discipline by the company, receive an hourly wage or salary, accomplishes tasks in the manner requested by the employer, and tends not to make investments in the work or incur costs associated with the work work. The company often provides training, supervision, and guidelines concerning the work product and also controls how the employee performs the work. For example, a receptionist who works from 9:00 p.m. to 5:00 p.m., at the company, has a supervisor who reviews his or her work and receives $15 per hour is likely to be classified as an employee.
Let’s look at another example:
Jane is hired by a timber yard to design a website for a set amount of money. She works from home, does similar work for a number of clients, and is free from the control and direction of an employer. Jane’s business is growing and she employs Tom to meet her clients’ needs. He works from her home office, is paid by the hour, and Jane has to check his progress and review his work after it’s done. Under California employment law, Jane is an independent contractor while Tom is an employee.
ABC Classification Test under California Wage Orders
For years- even decades- lawyers, judges, and government agencies used the Borello multi-factored classification test to determine whether a worker is an employee or contractor. One of the factors was based on the company’s ability to control how the work is performed and also the means by which the worker accomplished the desired results. If, for instance, a driver for a gig-economy car service decided when to start work on a particular day, what days to work, where to work, when to quit for the day, when to take breaks and for how long, and what to wear to work, it was highly likely that they would be classified as independent contractors.
But under the California Wage Orders, which guarantee employees meal and rest breaks, overtime compensation, maximum hours, minimum wage, and more, that is no longer the case. The California Supreme Court rejected the Borello test on April 30, 2018 and employers are now expected to meet a three-prong test- known as “ABC” test- to establish whether a California worker should be classified as an independent contractor or employee for the purpose of the wage orders. In doing so, the ABC test presumptively considers all workers to be employees. The company hiring a worker and classifying him/her as an independent contractor (who’s not intended to be included within wage order’s coverage) bears the burden of showing that the classification is proper under the ABC test.
Based on the applicable regulation or statute, California has a number of different for whether a worker is considered an employee of the given company. In Dynamex Operations West, Inc. v. Superior Court, the Court concluded that one of those definitions is “suffer or permit to work” would be applied in the determination of whether a worker is a contractor or an employee. To meet the burden of establishing the status of a worker, the company must prove that they meet the following three factors:
(A) that the worker is free from the direction and control of the company in connection with the work done, either by contract or in actual practice.
The California Supreme Court provided several examples to illustrate this part of the ABC test. In Western Ports v. Employment Sec. Dept., the company had previously misclassified its delivery drivers and was not able to prove that a truck driver was free from its direction and control as provided by Part A of the ABC test. This was due to the fact that the company required the driver to ask for permission before they transported passengers, ensure that the truck is kept clean, work on tasks not scheduled in advance, and could terminate the services of a driver for failure to contact the dispatch center, tardiness, or any violation as provided under the company’s policy.
In Great N. Constr., Inc. v. Dept. of Labor, the company sufficiently established that a worker who specialized in historic reconstruction was free of entity’s control because the worker purchased all the tools and materials he used on his own business credit card, worked without supervision, set his own schedule, and declined an offer of employment because he wanted to be free of the company’s control.
(B) the worker performs work that is outside the company’s usual course of business.
This means that a worker is considered to be an independent contractor if their roles are most clearly same or similar to those of employees but the work is performed outside the usual course of the business entity. As such, the worker is deemed to have an independent business and would not be viewed as working in the hiring entity’s business.
The Court set forth a few examples: When an outside electrician is hired by a retail store to install a new electrical line in the store’s premises or a plumber is hired to repair a leak in a bathroom, the services of the electrician or plumber are not part of the retail store’ s usual course of business. For this reason, the electrician or plumber would not have been suffered or permitted to provide services to the store as an employee.
Alternatively, workers are considered to be employees in the following examples:
- When a bakery hires cake decorators to work on custom-designed cakes on a regular basis
- When an art instructor is hired by a museum that offers classes to teach art classes on a regular and continuous basis
- When a dedicated, work-at-home seamstress is hired by a clothing manufacturing company to make clothes using the patterns and materials provided by the entity and that will be marketed and sold by the entity
- When a performer is regularly hired by a resort that provides entertainment
- When a timber management company that harvests trees and sells cut timber hires a worker to cut and harvest timber
One factor is common in all of these examples: workers are hired to perform work that is part of the company’s usual business operation. Therefore, under the (B) section of the ABC test, it would be reasonable to view them as employees.
(C) the worker is usually engaged in an independently established business, occupation or trade that is similar to the work performed.
When establishing a worker’s independent contractor status, it’s not enough that the hiring entity doesn’t prohibit the worker from working for other clients or having his or her business. Instead, courts will look at factors such as whether the business is advertised, whether it’s licensed or incorporated, and whether it offers services to the public and other potential customers. The ABC test requires the hiring entity to show that a worker who made the decision to go into business for himself or herself took the usual steps taken to establish and promote an independent business. Alternatively, if the hiring entity unilaterally labels the worker as an independent contractor, it means that the worker should be considered as an employee because he or she is not engaged in an independently established trade. Also, the fact that the hiring entity has not prevented or prohibited the worker from engaging in independent trade is not sufficient to prove that the worker made the decision to go into business for him/herself.
Attention has to be paid when classifying workers to ensure that they fall within all the requirements of A, B, and C. If a hiring entity fails to establish any one of these three parts of the ABC test, the result will be a finding that the worker is not an independent contractor but an employee for the purpose of the California Wage Orders. In addition, the California Department of Labor Standards Enforcement (DLSE) will use these tests to determine whether a worker is covered by the wage orders.
The Court’s ruling also means that independent contractors are safeguarded against exploitation by hiring companies and are in a better position to ensure that their rights are addressed and met with when doing business with certain companies. The law provides a degree of stability in terms of benefits, breaks, and pay scale that an individual is entitled to when working with a business.
Rights and Benefits that California Employees are Entitled To
Employees in California are entitled to a wide range of protection s under the state and federal law. Here are some of the rules that apply to employees but not to contractors:
- Employees are protected under state and federal anti-discrimination laws
- Employees are eligible unemployment insurance benefits
- Employees are entitled to wage and hour protections, including paid overtime, minimum wage, and meal or rest breaks
- Employers must provide their employees with workers’ compensation insurance
- Employers must withhold federal and state income taxes for their employees
Rights and Duties of Independent Contractors
When it comes to independent contractors, the “hiring” entity is considered to be a customer, not an employer. Independent contractors have the right to decide how, when, and where an assigned project will be completed. The company retaining the services of a contractor is not entitled to control and direct the work. The customer specifies the desired outcome of the work but the independent contractor has the freedom to determine how the outcome will be achieved.
While the customer cannot directly control or direct the work, it doesn’t mean that the independent contractor has total control over all aspects of the relationship. Independent contractors are obligated to promptly complete the project as per the specifications of their agreement. In addition, independent contractors have a duty to pay their taxes because the “hiring” companies are not entitled to withhold their taxes.
Written Agreements NOT Determinative
It’s common for hiring arrangement to involve written agreements in which the person being hired agree that he or she is not an employee but an independent contractor. This means that they agree that they’re not protected by California laws that apply to employees. This is just a label that a company places on a worker and it doesn’t legally determine the nature of a hiring relationship in California. If for instance, the worker and the company have a written independent contractor agreement but they act like an employer and an employee, California courts will not assume that the worker is a contractor just because it’s stated in an agreement. As such, one can be considered to be an employee even if the signed agreement states otherwise. What matters is the nature of the work involved and the relationship that exists between the parties.
In the same way, the fact that a worker is issued a 1099 form instead of a W-2 form for federal tax purposes is not determinative of whether the worker is an independent contractor. There are slight differences between the legal tests used to determine whether there’s an established employment relationship under California law and for federal tax purposes. Furthermore, some companies mistakenly misclassify workers as contractors in a bid to avoid the costs associated with employment.
Penalties for Misclassifying
Misclassification of employees is a punishable offense and it can be considered an attempt at tax fraud by the IRS. Willful misclassification of an independent contractor means avoiding employee status as defined under California law by voluntarily and knowingly misclassifying a worker as an independent contractor. Under Labor Code section 226.8, willful misclassification of workers carries a civil penalty of between $5,000 and $25,000 for each violation. If charged with this penalty, the employer is prohibited from making deductions or charging any fees from this compensation.
Employers are expected to be careful in determining which workers to classify as employees of independent contractors since there are many wage and hour penalties for missed meal and rest breaks, unpaid overtime, and unpaid wages. Also, an employee may be able to claim “liquidated damages” if the employer's actions were due to bad faith. The damages are equal to the amount of unpaid wages plus interest. In addition, an employee can sue for damages if the employer failed to provide meal and rest breaks because the worker was misclassified. The employee can claim damages for each break that he or she did not receive and can be equal to one hour’s pay at the regular rate. Generally, the damages available in a successful lawsuit depend on the wage and hour violations, including:
- Meal and rest break violations
- Overtime violations
- Minimum wage violations
- Willful misclassification of workers as independent contractors
An employer in California cannot fire an employee for reporting independent contractor misclassification and for exercising their rights under California labor law. Any retaliation for reporting willful misclassification or filing a wage and hour claim is against the law and is punishable. Retaliation, in this case, also includes wrongfully terminating the employee.
Statute of Limitations for Misclassification Lawsuits
Individuals who want to file a California wage and hour lawsuit against a company only have up to 3 years from the date when the most recent violation occurred. Conversely, the statute of limitations if 4 years if the employee has a claim against the employer for a breach of contract.
Finding Help for a Contractor or Employee Misclassification Lawsuit Near Me
If you’ve been working as an independent contractor and believe you were improperly misclassified, then California and federal laws provide you with ways to enforce your rights. You may have a wage and hour claim against the hiring company. If you're an employee and are not an exempt employee, you’re entitled to meal/rest breaks and overtime pay.
Due to the legal complexities involving the classification of workers in California, you may want to consult with an attorney who can explain your rights and legal options. At Stop Unpaid Wages, we represent employees in legal disputes with employers who break the law. Our attorneys are committed to helping workers find justice and the compensation they deserve. We serve workers anywhere in California and that means that we use modern technology to handle communications and make our clients’ lives easier. We're always willing to travel for situations that require a personal appearance.
If you have any questions about the differences between employees and independent contractors in California, want to discuss your case with an experienced California labor and employment lawyer, contact Stop Unpaid Wages today. Call 424-781-8411 or fill out our online contact form for a complimentary consultation.