How Employers Can Avoid An Employee Misclassification Lawsuit

If you’re an employer, it’s essential to understand how to properly classify your workers. Misclassifying an employee as an independent contractor can come with serious legal and financial consequences. While employers may sometimes intentionally misclassify workers to avoid providing benefits or paying payroll taxes, a willful violation can come with steep monetary penalties. But it’s important to understand that even inadvertent misclassification can result in an employee or the State of California taking legal action against you to recover their damages. Significantly, lack of intent is not a defense in employee misclassification cases — an employer has a responsibility to understand their obligations and make any necessary corrections once they become aware of the misclassification. Here are three things that employers should keep in mind to avoid an employee misclassification lawsuit:

1. Know the Difference Between an Employee and an Independent Contractor

Typically, workers are classified as either employees or independent contractors. It’s vital for employers to understand the difference between the two in order to avoid a potential employee misclassification lawsuit. An employee is a worker who performs services for an employer and is under their control. In contrast, an independent contractor is someone who is in business for themselves.

The basic test in California for determining whether a worker is an independent contractor or an employee is whether the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; the worker performs work that is outside the usual course of the hiring entity’s business; and the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. While a Court may consider other factors, such as whether the worker provides their own tools to perform the job, they are paid via invoices, or there is a service contract between the parties, if one or more of the elements above are not met, the worker will likely be considered an employee.

Understanding the distinction between employees and independent contractors is crucial when it comes to employment law matters. Critically, independent contractors are not subject to minimum wages requirements, overtime pay, unemployment insurance, and paid family leave — but employees are. In addition, while employers are required to withhold income tax, Social Security, and Medicare for employees, independent contractors are responsible for paying their own taxes.

2. Understand the Exemptions

Another common reason employee misclassification lawsuits are brought is due to an employer misclassifying an employee as “exempt,” rather than “non-exempt.” While the largest group of exempt employees includes administrative, executive, and professional employees, exemption status is not simply based on a worker’s job title — or the fact that they are paid a salary. Generally speaking, to be an exempt employee in California, three requirements must be met:

• The employee must be engaged in duties that are executive, administrative, or professional in nature more than 50% of the time.
• The employee must regularly and customarily exercise independent judgment and discretion in their job.
• The employee must earn a minimum monthly salary of no less than twice the state’s minimum wage required for full-time employment.

In addition to the white-collar exemption, other exempt employees include computer professionals, doctors, surgeons, public employees, and outside salespeople, amongst others. Unless an employee falls under an exemption, they are considered a non-exempt employee who is entitled to the applicable minimum wage, overtime pay, rest breaks, and meal breaks.

3. Be Aware That a Contract is Not Always Dispositive

Although many employers present independent contractors with contracts that outline the scope of the relationship, this document doesn’t always determine a worker’s employment status. California employment law would apply in the event a worker meets the criteria for an employee — regardless of how a worker is labeled in the contract.

In other words, a contract is not always dispositive. If a worker is classified as an independent contractor but performs their tasks under the control of the principal, they are most likely an employee. This ikk, means they would be entitled to all the legal protections that come with employee classification.

Contact an Experienced California Employment Law Attorney

If you’re an employer, it’s critical to ensure workers are classified correctly to avoid the legal consequences that can come with an employee misclassification lawsuit. At White & Bright, LLP, we work with employers to help ensure they are compliant with the applicable state and federal employment laws — and defend them in litigation when necessary. We welcome you to contact or call us at (760) 747-3200 to learn more about our legal services.