Beware of How You Classify Independent Contractors

Employment law is usually the last subject a business owner wants to hear about. But imagine this: You have an innovative idea for a business, and you build it from the ground up. Your entire career has been leading up to this.

Then you get hit with a lawsuit for not only unpaid wages but also for tens of thousands of dollars in penalties (and attorneys’ fees!) from someone who worked for you for mere months.

It’s difficult to recover from, and for a small business with a few employees banding together, it can be absolutely destructive.

All because the worker was misclassified as an independent contractor.

On January 1, 2020, a California law went into effect that has already been a game changer for California employees, taxpayers, and the state’s economy. That law is Assembly Bill (AB) 5, and it applies to the majority of California workers, with very few exceptions.

Workers misclassified as independent contractors not only don’t get overtime but also don’t get compensation for missed meal or rest breaks, or benefits, like sick pay. Because the worker is technically their own boss and responsible for business losses, they may come after the business for unreimbursed expenses that are completely unanticipated.

Let’s take the example of someone in customer service working from home for a small business and earning $20 per hour. That person is working 50 hours a week and quits his job after 10 weeks. Later, the worker claims that he’s owed overtime and could not take breaks because work was so busy. In this scenario, the worker could make a claim for the following:

• Overtime: $20 x 1.5 (time and a half) x 10 hours per week x 10 weeks = $3,000
• Meal Breaks: $20 x 5 x 10 = $1,000
• Rest Breaks: $20 x 5 x 10 = $1,000
• Wage Statement Penalties: up to $4,000
• Unreimbursed Expenses: $1,000
• Penalties Pursuant to the Private Attorney General Act (PAGA): up to $25,000 per employee for misclassification, not including other penalties
• Penalties Pursuant to Labor Code Section 226.8: up to $15,000, not including other penalties
• Attorney Fees?

As you can see, what should be a simple claim for wages can easily morph into a six-figure case.

It might seem as if it’s to the business’ benefit to treat this worker as an independent contractor in the short term. Yet courts and state agencies will most likely treat him as an employee, should it come to that, and attorneys’ fees are usually only recoverable by the employee. This is because the state loses revenue from payroll taxes, premiums for workers’ compensation, Social Security, unemployment, and disability insurance — and has an interest in collecting this back pay from businesses.

The best protection a business has is to err on the side of caution and classify workers as employees to avoid this mess. However, it’s wise to consult with an attorney before making long-term decisions that will have ripple effects on your business. The statute of limitations for employment cases is quite generous for employees and misclassified workers.

This article does not constitute legal advice. If you’re seeking counsel on this topic, please consult a legal professional.

Elana Levine is senior counsel at Jacobson, Russell, Saltz, Nassim & de la Torre in Los Angeles. Her practice focuses on the representation of artists and businesses in the entertainment industry. She can be reached at lani@jrsnd.com.