Risks and Liabilities for Employee Misclassification in California
What are the risks and financial liabilities for employee misclassification in California? Why should any company who uses independent contractors or other 1099 workers in their business strategy reconsider each and every instance of this practice? What has changed under California law and how can the misclassification of an employee cause extensive damage to your company and potentially threaten long-term viability?
The central issue associated with these questions is a recent decision by the California Supreme Court that establishes a new legal standard for California employers. The law now states that all workers in California are legally presumed to be employees. The legal burden of proof in these matters now falls upon the provider of work (the employer) as to whether or not a worker can be classified as an independent contractor or 1099 worker.
The Supreme Court decision established an important “A-B-C Test” to determine the legal basis for the type of worker who can be classified as an independent contractor. The provider of work must be able to prove:
• “that the worker is free from control and direction
over performance of the work both under the contract and in fact.” and
• “that the work provided is outside the usual course of the business for which the work is performed,” and
• “that the worker is customarily engaged in an independently established trade, occupation or business.”
Therefore, if the independent contractor performs any function which is associated in any manner with the ordinary conduct of the business at hand or how a company’s products and/or services are delivered, they must be classified as an employee. They must also have an independent business entity which has control over providing services and products to multiple customers and complete control over decision-making and the execution of how they deliver value.
The civil penalties for misclassification of an employee in California are the first financial exposure an employer will face. California has established a civil penalty of at least $5,000 for each violation. The civil penalty can quickly be increased to $25,000 if the patterns involved in the case involve more than one employee or a set of circumstances that the governing agency believes occurred over a substantial period of time or affected a substantial amount of business revenue. Which amount do you believe is most often applied to these cases?
The next financial challenge an employer will face relates to claims associated with unpaid employment-related taxes and employment benefits including but not limited to unpaid federal, state and local income taxes, unpaid wages such as minimum wages or overtime, workers’ compensation premiums as well as Social Security and Medicare premiums. The look-back period for all of these expenses is four years.
The dispute will quickly turn to unpaid benefits the worker would have received if they had been properly classified as an employee such as health care, retirement contributions and associated matching funds, sick leave, Paid Time Off (PTO) or other similar employee benefits. This will often result in a plaintiff’s class action lawsuit under the California Private Attorneys General Act (PAGA) that allows access to all internal records associated with other employees, past and present, who were similarly misclassified over the look back period of four years.
The legal and financial risks and liabilities for employee misclassification in California are staggering and often threaten the sustainability of the underlying business entity. This is why it is important to seek immediate counsel from an experienced employer defense attorney in California to provide sound advice and counsel on potential exposures and proven strategies to mitigate risk and resolve existing exposure(s).