Ramifications of employee misclassification reach beyond individuals

Misclassification of employees as independent contractors results in lost benefits and wages for workers.

Across California and around the country, thousands of employees are improperly classified as independent contractors by their employers. These workers routinely lose out on key benefits offered to full-time employees, including the opportunity to seek company-sponsored health insurance, the ability to earn retirement funds, the protections of unemployment insurance, the earning of overtime compensation, the ability to accrue sick and vacation time, and more.

Workers wrongfully classified as independent contractors also can't take advantage of protections offered by state and federal laws such as those preventing discrimination (equal employment opportunity statutes), protections from being fired for personal medical issues (the Family and Medical Leave Act), and the benefits of unions or collective bargaining organizations.

The Department of Labor (DOL) once estimated that as many as 30 percent of businesses participating in the unemployment insurance program had misclassified employees, but since classification data is only provided voluntarily, the real number could be much higher. Misclassification runs rampant throughout many industries (including housekeeping, hospitality, child care, retail, restaurants and, in particular, construction), but its effects reach across all economic lines, ranging from professionals at Fortune 500 companies to part-time workers at "mom and pop" businesses. The Internal Revenue Service (IRS) estimates that the federal government loses upwards of $2 billion annually because of employee misclassification in the form of lost income taxes, lost payments to Social Security and Medicare and lost unemployment taxes.

Employee or independent contractor? That is the question.

There is no single federal law that dictates how to decide if a worker should properly be considered an employee or an independent contractor. There are, however, some criteria used by large government agencies - namely the IRS and the DOL - that can help employers and employees alike make sense of this sometimes difficult determination.

The IRS test covers three distinct categories:

  • Behavioral - Does the company have control over the worker and how he/she does the job?
  • Financial - Does the company control the business aspects of the worker's job (including how and when he or she is paid, whether expenses are reimbursed, whether supplies are provided, etc.)?
  • Relationship - Is there a written contract between the worker and the company? Are employee-type benefits like healthcare, pensions, vacation hours and sick time available to the worker?

The Department of Labor uses a multi-prong test that rests on the issue of "economic reality." The DOL economic reality factors come from precedential federal court cases dealing with employee classification. These include:

  • Extent to which services offered by the worker are an "integral part" of the company's business
  • Permanency of the relationship between the worker and the business
  • Amount of the worker's personal investment in facilities and equipment
  • Extent of control exhibited by the company over the individual
  • Worker's opportunities for profit and loss
  • Level of skill required
  • Extent to which the worker's success turns on the input/initiative/foresight/judgment of others
  • Degree of business organization and operation independent of the worker

Purposeful employee misclassification rarely occurs as an isolated incident; if you have been misclassified, chances are good that more workers have been as well. There are ways to hold these wrongfully acting employers accountable for their actions, though. To learn more about legal options - including class actions or individual lawsuits - contact an experienced employment law attorney like those at the San Diego law office of The Emge Law Firm, LLP. Call them locally at 619-595-1400 or toll-free at 866-629-3409, or send them an email.