Employee Misclassification –Employees and Independent Contractors under California Law?



Employee misclassification occurs where employees are classified as independent contractors. While some misclassifications are caused by ignorance, others are done intentionally by employers to avoid legal obligations to workers. Misclassification denies the affected workers rights and benefits that they’re entitled to.

For instance, misclassification can affect the overtime pay rate for employees who work over 8 or 40 hours a week or month, respectively. Employee misclassification is an offense with serious consequences, according to employment law in California.

Why Authorities Care about Employee Misclassification

Authorities care about employee misclassification for various reasons:

1. Tax Reasons

Workers’ misclassification deprives the government of revenue– withholding tax. Employers withhold income tax before distributing salaries and wages to employees. On the other hand, independent contractors submit their taxes to relevant authorities. Consequently, misclassifying employees as independent contractors reduces the government’s tax revenue.

2. Incorrect Deduction Expenses

Independent contractors are allowed to deduct certain expenses– also called allowable expenses, from the gross income when calculating their tax expenses. On the other hand, employees do not qualify for such deductions, including:

  • Transport expenses;
  • Health insurance contributions;
  • Pension contributions;
  • Expenses incurred on office equipment.

Like in the previous point, misclassifying employees negatively impacts governments’ tax revenue.

3. Benefit Deprivation 

Most states require employers to make compulsory contributions to benefit workers. The common compulsory contributions can include:

  • Contribution to health insurance;
  • Contribution to pension schemes;
  •  Workplace compensation levies. 

In this case, employee misclassification denies workers of their benefits besides increasing the burden of providing essential services to governments.

4. Removes Workers’ Protections 

Employees have certain protections that do not apply to independent contractors, such as minimum wage protections, sick leaves, annual leaves, and maternal & paternal leaves, non-discrimination at the workplace, and more. In contrast, contractors are protected by contract law.

5. Breaching Industry Agreements (Awards)

Certain standards apply across industries in most states to provide more protection in addition to the protections provided by employment law. In this case, employee misclassification causes a breach of such standards. 

Who is an Independent Contractor?

Although both independent contractors and employees are hired through contracts, they’re distinct and different types of workers. The distinctions between independent contractors and employees can include:

1. An independent worker’s contract is short-term based while an employee’s contract is long-term based.

2. Contractors do not take orders from clients, unlike employees who take orders from their employers.

3. Independent contractors are hired for one-time jobs while employees work for their employers daily.

4. Independent contractors can work for different clients, unlike employees who can only work for one employer;

5.  Independent contractors are self-employed while employees are hired.

Contractors vs. Employees– Test Criteria

Differentiating employees and contractors can be challenging in some jobs. For this reason, the Department of Labor (DOL) encourages recommends a particular way of establishing whether a worker is an employee or a contractor.

Assembly Bill 5

Assembly Bill 5 (AB 5) was passed on 1st January 2020. Employers in California must use the “ABC test”, specified under the AB5 when classifying employees in California. Also, the bill addresses wages, unemployment benefits, and employees’ compensation coverage.

Workers in California are considered independent contractors if the following statements describe their jobs, as per the ABC test.

  • The worker is not involved in the hiring of employees;
  • The worker can perform other duties besides the hiring entity’s core business
  • The worker is engaged in an independent trade that specializes in the work being performed.

It should be noted the two tests have certain exemptions. For instance, the ABC test does not apply to some professions as specified in Prop 22. Also, AB 5 exempts physicians, lawyers, accountants, insurance brokers, and more–that’s why it’s important to consult an employment lawyer when classifying workers.

How Employers Can Avoid Employee Misclassification 

The following recommendations can help employers avoid workers’ misclassification:

  • Engaging a Professional Employer Organization (PEO)
  • Ensuring employment contracts are drafted professionally;
  • Developing company-wide contracting policies; 
  • Consulting employment lawyers for legal counsel;
  • Researching about workers classification in your state.

Resolving Worker Misclassified

Misclassified employees can file a wage and hour claim against their employer. For instance, if your typical workday is more than eight hours, you should recover unpaid overtime in addition to money owed for missed meals and rest breaks. Most people hire employment lawyers to increase their chances of success. A lawyer can help victims of misclassification with:

  • Legal counsel and representation;
  • Filing a misclassification claim;
  • Interpreting employment and labor laws;
  • Negotiating fair settlements;
  • Appealing unfair judgments;
  • Ensuring your legal rights are not violated;
  • Ensuring you’re protected from retaliation.

Workers’ misclassification is an employment offense punishable by law. Under California employment and labor laws, misclassified workers can bring claims of misclassification against their employers. Also, employees should seek to know their employment status, according to California law.


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