Employee Misclassification: Understanding the Consequences for Employers

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Employee Misclassification: Understanding the Consequences for Employers

California law requires employers to correctly classify employees. Incorrect classifications can be costly with fines of up to $25,000 per violation. Plus, the EDD can add penalties of up to 15% if you disregarded the requirements to report and pay taxes for the workers you misclassified. It gets costly.

Employers often try this to get out of paying employment taxes and benefits like health and dental insurance. It can keep an employer from having to pay overtime. It’s a practice that was widely abused across California and the U.S., leading to changes in California’s employment laws.

What can you do to ensure you’re properly classifying your workers? California uses the ABC Test to answer this question. AB 5 was signed into law in 2019 and requires companies to use the ABC Test to determine if a worker is an employee or an independent contractor.

Take a Closer Look at California’s ABC Test

The ABC Test is a three-part test to determine exactly what role a worker has within your company. If you’re a contract worker, use this test and see if you have been correctly classified. You must consider and answer these questions.

Part A: 

Does your company have any control over or otherwise direct the worker’s performance during the extent of the contract and while doing work for you? 

Suppose you’re hiring an online support person to work from their home, but you require them to be online and ready to answer questions from 9 a.m. PST to 4 p.m. PST. You are controlling their work hours and cannot call them a contractor. 

Suppose you’re hired to be an office cleaner, but they require you to be available during specific hours five days a week. You must attend all employee safety and sexual harassment training sessions or you’ll be replaced by a competitor. You may have been misclassified.

Part B:

Does the worker do tasks or jobs that are outside of your usual business practices?

If you have hired a worker to do things that are a normal part of your business, you cannot answer the Part B question with a “yes.”  Say you hire an electrician to wire your new office for computer stations in an insurance company, the electrician is doing work that’s outside of your business practice. The electrician counts as a contractor. 

Now, you hire at-home workers to take calls and guide people to the right insurance plan. They are doing work that’s a normal part of your business, so you would not be able to meet the requirements of Part B.

Suppose you’re a personal chef and are asked to work at a restaurant for a wedding catering job. You would be doing work that’s within the restaurant’s usual business practice. You would qualify as a temporary employee and not a contractor.

Part C:

Finally, there’s Part C that asks if the worker has an independently established occupation or trade that provides the same type of work they’re doing for your company. 

Go back to the first example where you hire a work-from-home support desk person to take customer service calls. That worker’s website markets skills such as bookkeeping and tax preparation, not customer service. You couldn’t meet the requirements of Part C.

If the worker doesn’t have an independent business but is building a virtual customer support business after the contract with you is up, you cannot claim that it is currently that worker’s independent business.

You are a self-employed virtual assistant and you’re asked to work for a company that pairs virtual assistants with clients in need of service. You’re providing the same services as the company, so you could be classified as a contractor.

In some situations, the ABC Test isn’t applicable. In this case, the older Borello Test is used. Occupations where the Borello Test is used instead include certain:

  • Recording industry marketing, promotions, or distributing
  • Licensed brokers and insurance agents in underwriting, audits, risk management, and claims adjusting
  • Medical, dental, and veterinary fields
  • Investment and security advisors, brokers, or agents
  • Commercial fishers
  • Manufactured home sales
  • Direct sales
  • Competition judges
  • Home inspections

How Does the Borello Test Differ?

When the Borello Test is applicable, how did it differ? It was a ten-factor assessment program that looked at:

  1. Does the worker have the right to control how the work is done?
  2. Can the working relationship end at any moment without cause?
  3. Is the work something that can be completed by a person or specialist without supervision?
  4. Is a specific skill required?
  5. Does the worker own a business or work in a self-employed position that fits the work requirements?
  6. Does the worker or business provide the equipment needed to do the work?
  7. Is the payment by the job or by the time it takes?
  8. How long is the job going to last?
  9. Are the job duties being provided as part of the company’s normal business?
  10. Does either of the parties believe the relationship is employer-employee?

While the ABC Test required all three factors to be met in order to confirm the worker is a contract employee, the Borello Test only requires some factors to be no answers.

Examples of Misclassification and What It Cost the Business

In 2021, several workers filed a lawsuit against a national tool company. The workers attended 60 hours of classroom training programs and 80 hours of field training to become a tool company’s distributor. But, they were classified as contract workers. The requirement of on-site and in-the-field training classified him as an employee per California law.  Members of the lawsuit were awarded their share of the nearly $16 million settlement.

In another case, a GrubHub delivery driver filed an employee misclassification case against GrubHub to get overtime pay and protection through the state’s minimum wage laws. He won his case and is now classified as an employee and has to be paid minimum wage and receive overtime.

Transportation firm Hub Group, Inc. was sued for the misclassification of its drivers. The battle started ten years ago with settlement talks starting in 2019. The company finally settled for around $5 million.

How Can You Avoid Misclassifying Your Workers?

What’s the best way to avoid misclassifying your workers? Talk to an employment law attorney about the roles you have within your company and how you should be classifying those workers. 

Ask the attorney to draw up an employment contract that makes it clear when and why a worker’s role has been classified as an independent contractor. If you’ve been accused of misclassifying workers, you also need to consult with an employment law specialist to learn how to proceed.

Are you in a work-from-home or on-site job that’s being classified as a contract worker and you’re concerned you’ve been misclassified? Again, talk to an employment law specialist to make sure you’re not being treated unfairly. You shouldn’t miss out on benefits, overtime, and paying self-employment taxes if California classifies you as an employee. Shegerian Conniff is the expert you need on your side if you’ve been misclassified.

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