Independent Contractor Misclassification, AB5, and YOUR rights!
Updated: Jun 13
We’ve been hearing a lot about Assembly Bill 5 or “AB5” in the news recently, as well as multi-million dollar ad campaigns to fight against it. In essence, AB5 did little more than codified a recent California Supreme Court, Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal. 5th 903. Unsurprisingly, big gig-based businesses like Uber and Lyft have spent MILLIONS fighting AB5 as it strikes a blow to the heart of their organizations. Gig-economy businesses rely on using independent contractors to conduct their business. It should be noted that gig economy businesses are not the only ones that violate AB5, as other businesses have misclassified line cooks, bartenders, hostesses, drivers, chefs, project managers, bouncers, etc. This article will walk through the basics of AB5 and independent contractor misclassification.
What Is An “Independent Contractor?”
The Labor Code defines an independent contractor as anyone who is hired to complete a specific task and controls how the job is completed. (Lab. Code § 3353.) The most familiar independent contractors are electricians and plumbers - you hire them, they come, do whatever needs to be done, you pay, they leave. In these scenarios, the hiring entity does not interfere with the manner the contractor does their work – it’s only interested in the result.
What is Independent Contractor Misclassification?
Independent contractor misclassification occurs when an employer classifies a would-be employee as an independent contractor. When employers misclassify employees as independent contractors, it is the only party benefiting from the misclassification. The employee is then responsible for a myriad of extra tax consequences on their earned wages. Workers who have been misclassified as independent contractors (but should have been a W2 employee) can file a lawsuit seeking damages. Damages include:
Unpaid Overtime wages;
Paid Sick Leave protections;
Wage Statement violations; and,
Any available penalties and interest.
Why Does Independent Contractor Matter?
Classification matters. Should an employer improperly classify a worker, the worker may see an instant benefit (i.e., they get more money in their pocket, immediately.) However, when employers classify workers as independent contractors, in doing so, they merely reduce the cost of doing business (i.e., labor costs.) These costs include:
State income tax and income tax withholding
Wage and hour (enforced by the Department of Labor)
Many different types of benefits (overtime, sick leave, reasonable and necessary expenses, retirement)
At first, this may seem like a win/win for both the company and the worker. However, the government still wants its cut … and they’ll get it directly from the employee! Independent contractors will be required to pay both the employer and employee portion of Social Security and Medicare taxes, roughly 15.3% instead of the 7.65% for regular employees. That percentage is then added to whatever federal, state, and local income taxes he or she will owe.
What Test Do Courts Use To Determine Who Is An “Independent Contractor?”
As mentioned above, the California legislature passed AB5, which codified the “ABC test” for determining whether a worker is an independent contractor or an employee. The ABC test presumes that all workers are employees, with some exceptions, as can be found HERE. In short, a worker may be classified as an independent contractor if the employer can establish all of the following:
A – The worker is free from the control and direction of the hiring entity, both under the contract and in fact; and,
B – The work must be outside the normal course of the hiring entity’s business; and,
C – The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
The employer must show ALL of these points for the worker to be properly classified as an independent contractor. Should it fail to do so, the worker is improperly misclassified and should be treated as an employee.
What If I Signed an Independent Contractor Agreement?
Employees often believe that since they’ve signed a contract which purports to designate them as independent contractors, they cannot dispute it. This is wrong. Employers know this and, in most cases, require the worker to sign some sort of “contract” or “independent contractor agreement.” Yet, courts will look beyond the piece of paper and will examine your working relationship with the hiring entity and then it will make its determination as to the proper classification.
This is confusing! How do I get help?
There is no doubt that all of this is confusing – employers like it this way! If you’re still reading this blog post and are thinking that you may have been misclassified, it may be wise to consult with an attorney who has experience dealing with independent contractor misclassification.
Lansdown Law - Experienced Misclassification Attorney
Lansdown Law has experience in handling cases where employers have intentionally misclassified their employees as independent contractors in violation of the California Labor Code. Give us a call and we can walk through your situation, come up with a plan, and go from there.
Disclaimer: All materials have been prepared for general information purposes only to permit you to learn more about Lansdown Law, its services, and experience. The information presented is not legal advice, is not to be acted on as such, may not be current and is subject to change without notice.