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The Siren of Employment Misclassification: Growing Dangers to California Businesses

Posted by Alvin Lee | Sep 20, 2017 | 0 Comments

Increasing Attention on Employment Misclassification

Starting or maintaining a business can be a costly and risky endeavor, even for the most experienced business owner and the most skilled specialist in an industry. One of the largest costs a business faces is the cost of an employee. A business often pays between $1.30 to $1.50 for every $1.00 of wages paid to an employee due to payroll taxes, insurance, worker's compensation, benefits and other expenses. This leads many businesses to explore contracting independent contractors instead of employees, where the company typically pays $1.00 for every $1.00 paid to a contractor. However, this can oftentimes lead to trouble, particularly if the contractor is actually an employee.

Although employment misclassification is not a new issue, it has become an increasingly talked about subject, as the number of high profile cases continue to make their way into the spotlight.  

In 2016, Uber famously reached a landmark settlement with 385,000 drivers, agreeing to pay $84 million and an additional $16 million under certain conditions involving the possibility of Uber going public.[1] However, the lawsuits have continued, as Uber still faces separate suits under the Fair Labor Standards Act, a federal statute, that appears to be moving in a director favorable to the drivers.[2]

Uber hasn't been the only driver service targeted by misclassification claims. Earlier this year, the Northern District of California approved a $27 million settlement agreement regarding a lawsuit against Lyft. [3] However, like Uber, Lyft will also face substantially similar consequences if legally similar cases rules in favor of the drivers.

In 2016, Amazon was also the target of a lawsuit by three delivery/courier drivers for Amazon's “Flex” program where Amazon had classified the delivery drivers as independent contractors.[4] The Flex program is functionally similar to the transportation services offered by Uber or Lyft; however, instead of transporting passengers, the drivers deliver packages. In the opinion of this blogger, I suspect that this lawsuit will eventually result in a settlement as well. Amazon is also facing a separate suit regarding employment misclassification and overtime wages as well.[5]

The most recently developing story involves a 2015 lawsuit against Grubhub, a food delivery service, similar to the likes of DoorDash, UberEats, Postmates, BeyondMenu and others.[6] Unlike the other cases mentioned, this case went to trial two weeks ago on September 5, 2017. This case also brings up some interesting thoughts raised by Grubhub about whether someone can be “on the clock” for two or more different employers at the same time and, if not, whether that should be considered in determining whether someone is an employee or an independent contractor. The verdict on this case is expected any day now.

However, it's not just drivers and couriers being caught up in the statewide (and in some cases, nationwide) controversy. It comes up in real estate, cleaning and janitorial, retail and internet sales, medical (including chiropractors, dentists, etc.), consulting, staffing, adult entertainment, security, landscaping, hospitality, bars and restaurants, construction and countless other industries. And these violations are not limited to large companies. In fact, it's significantly more prevalent among small businesses.[7] The difference is that a large company will almost certainly survive the worst outcomes of a violation or a group of violations; whereas, the fines and penalties associated with a violation could cripple or bankrupt a small business.

The Confusion in the Law

This is where things can get confusing or a bit muddied. In California, alone, there are at least five different legal parameters that determine whether someone is an employee or an independent contractor of a business. This is because the California Labor Code, the Industrial Welfare Commission, the Fair Labor Standards Act, the Internal Revenue Code, and rules set by the Employment Development Department, all set similar but legally different “tests” when considering the classification.

The gist set by each of the bodies of law all focus on the fundamental issue of whether the employer has control over the person. However, how a court or an agency determines control is where each of the five “tests” are different. Moreover, depending on the type of business or industry, there could be additional standards and rules that play a role in the determination.

There are some additional considerations:

  • When a claim or suit is filed alleging that the plaintiff was an employee of the business, it shifts the burden to the company to affirmatively disprove. Functionally, this means that when a claim or suit is filed, there is a presumption that the person is an employee that the company must disprove.
  • Due to the nature of these types of claims, a plaintiff does not need to prove all of the factors in the tests. If the plaintiff can demonstrate just a handful of them (or even a few if they're stronger factors), it can be enough to prevail against the business.
  • If the company and the contractor intended to create an independent contractor relationship, the intent may be relevant (but not always); however, even when it is relevant, it is typically weighted as the least relevant factor to be considered. This is true even if it was the contractor who proposed the contractor-relationship and prepared the documentation to memorialize the arrangement.
  • Ignorance of laws is virtually never a viable defense.
  • The statute of limitations for a California matter can go back upwards to three years of misclassification time from the date the action is filed (sometimes four years if pursued strategically).
  • The statute of limitations for a matter under the Fair Labor Standards Act can go back upwards to four years of misclassification time from the date the action is filed.

How Misclassification Usually Occurs

Typically, there are two types of violators when it comes to employment misclassification.

The first, and likely most common between the two types of violators, is the business that doesn't fully understand the difference between independent contractor and an employee, nor do they fully comprehend the legal parameters that establish (whether it was intended or not) when someone is an employee rather than an independent contractor. This is compounded by inherent confusion over conflicting legal standards set by different agencies and jurisdictions. There are times when a company may be complying with standards set by the U.S. Department of Labor but are in violation of California Labor Codes and Industrial Welfare Commission Wage Orders.

On the other hand, sometimes this ignorance of the law can be characterized as “willful ignorance”, where objectively, the business probably should have known the law, or taken the time to find out more information, but chose not to. And sometimes the misunderstanding is the result of common industry standards or practices that, while still entirely unlawful, are normalized by the marketplace and rarely challenged, if ever.

The second type of violations that occur are by the willful violators. The willful violators know, whether because they've faced issues in the past or the circumstances are egregiously blatant, that their classification of someone as an independent contractor is incorrect. Depending on the agency or court that is presiding over a suit against a willful violator, the penalties and consequences are oftentimes substantially more severe.

Consequences of Misclassification

The consequences to employment misclassification can be extensive. Even in minimal circumstances, there are ways for the numbers to get distressingly high. At a minimum, a misclassified employee is entitled to the back-owed wages for all regular wages and overtime wages based on their calculated rate of wages. This includes time where the misclassified employee wasn't necessarily working but was waiting to work. For example, if an employee was scheduled to be available for eight hours on a particular day but only performed work during two of those hours, the employee may be entitled to eight hours of pay for that day.

 In addition to back-owed wages, a business can liable to a misclassified employee for:

  • 30 Days Pay. The failure to promptly pay a terminated employee all wages due and owed[8] may subject the employer a penalty up to thirty times the employee's daily wage.[9]
  • Itemized Wage Statement. A misclassified employee may claim that the business violated the employee's right to receive an accurate itemized wage statement for each pay period.[10] The nature of the misclassification means that most, if not all, of the wage statements given to the employee during their employment were inaccurate. The penalty is $250 per employee for the initial failure and $1,000 per employee for each subsequent failure.
  • Record-keeping Requirements. A misclassified employee may claim that the business violated California's timing and recordkeeping requirements.[11] The court could award penalties of $50.00 or $100.00 per employee per pay period and up to an additional 25% of the wages not paid to each employee during each pay period.
  • Private Attorneys General Act. Separate and aside from all other civil penalties imposed, the Private Attorneys General Act (“PAGA”) allows a private individual (the misclassified employee) to obtain permission from the California Labor Commissioner's Office to sue an employer on behalf of the State of California for an entirely distinct and separate set of civil penalties.[12] Under PAGA, the misclassified employee is entitled to 25% of the PAGA civil penalties incurred against the employer.

Notably, there are several ways for a company to be liable for multiple penalties for the same violation, particularly as set forth under PAGA.

However, it's not just the plaintiff in a lawsuit or the statutory civil penalties that a business must worry about. There are other parties or agencies that have a vested interest in these types of suits. Not least among the interested include the Internal Revenue Service, the Employment Development Department and the State Franchise Tax Board. When a company has been adjudicated to having misclassified employees as independent contractors, it means that the IRS, EDD and State Franchise Tax Board have been shorted their fair share as well.

Businesses Must be Proactive

The moral of the story is that if you are a business that is contemplating classifying someone as an independent contractor, speak to a qualified attorney first. If you are a business and have classified one or more persons as an independent contractor without speaking to an attorney, speak to an attorney to review the classification(s). The opportunity to reduce costs is always alluring, but it can come at a steep cost when the opportunity isn't analyzed and implemented properly.





[4]; see also




[8] If the employer terminated the employment, the employer must ensure that the final paycheck is available to the employee by the end of that business day. If the employee terminated the employment, the employer must ensure that the final paycheck is available to the employee within three business days.

[9] Cal. Lab. Code §203.

[10] Cal. Lab. Code §226.3.

[11] Cal. Lab. Code §210.

[12] Cal. Lab. Code §§ 2698 – 2699.5.

About the Author

Alvin Lee

Location: Dublin, California Phone: 925-338-9882 Email: Email Me Areas of Practice Estate Planning Business Law Estate Administration Trusts Wills Bar Admissions California U.S. District Court Northern District of California Education Thomas M. Cooley Law School, Lansing, ...


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