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Worker misclassification is a long-standing problem. A study by the IRS, in 1984, found that 3% of workers were misclassified as independent contractors. By 2000, the Department of Labor found that up to 30% of employers were misclassifying workers.
Misclassification takes an enormous toll on workers and government revenue. As the AFL-CIO explains, “Misclassified employees lose workplace protections…; face an increased tax burden; receive no overtime pay; and are often ineligible for unemployment insurance and disability compensation. Misclassification also causes federal, state, and local governments to suffer revenue losses as employers circumvent their tax obligations.”
The IRS requires that a worker be classified as an employee (W-2) if the employer exercises substantial control over how the worker does his or her job. Workers who have other clients besides the employer, are more likely to be independent contractors (1099 workers). In contrast, workers who only do work for a single employer and report to a manager within the company are more likely to need to be treated as W-2 employees
The 1984 IRS study found 3.4 million misclassified workers out of a labor force of about 113 million, according to the Bureau of Labor Statistics.
Are you misclassified as an independent contractor?
If your employer is misclassifying you, contact us to speak, confidentially, to one of our attorneys. We provide free consultations.
Why Employers Misclassify: Reducing Their Taxes and Avoiding Worker Protections
An employer’s “largest incentive for misclassifying workers,” says the AFL-CIO, is avoiding payroll taxes (such as for Social Security, Medicare, and unemployment insurance). The burden of paying such taxes is shifted onto the worker. According to the Economic Policy Institute, employers can reduce payroll costs by 20 to 40% by classifying workers as independent contractors.
Beyond reducing tax burden, employers may have many other reasons to misclassify workers. Independent contractors do not enjoy the same protections under state and federal labor laws. Contractors may not be entitled to a guaranteed minimum wage, overtime pay, or meal and rest breaks. Independent contractors also cannot enroll in the employer’s health and retirement plans, which may save employers substantial sums. A string of lawsuits accused FedEx of misclassifying its delivery drivers to shave 40% off its labor costs.
Gig Economy Companies in Frequent Legal Trouble over Misclassification
As Fast Company explains, on-demand app companies are facing increasing flak for their practices of classifying their workers as independent contractors. Fast Company notes that Uber and Lyft have faced lawsuits alleging worker misclassification, and Lyft settled with California drivers for $27 million. Fast Company furthers that Handy, an on-demand cleaning service, faced a class action lawsuit over worker misclassification; and high-profile stories about Homejoy, another cleaning service, were published detailing “grueling hours” for “little pay,” leaving at least one worker homeless. Fast Company says workers on Amazon’s Mechanical Turk, “an online platform that pays independent contractors cents per task,” recently begged CEO Jeff Bezos to treat them like “actual human beings”; and Crowdflower, which also pays independent contractors to complete tasks, was recently confronted with a worker misclassification lawsuit
Companies Expand Their Misclassification Tactics
One tactic utilized in the trucking industry is to treat their workers as “owner-operators” rather than contractors, explains David Weil, head of the Department of Labor under Obama. A year-long investigation by USA Today uncovered that trucking companies were requiring their workers to own their trucks. When workers could not afford the trucks, the company offered to let them finance the vehicles. The drivers’ earnings would all go to the company to make payments on the vehicles. USA Today reports that:
If a driver quit, the company seized his truck and kept everything he had paid towards owning it. If drivers missed payments, or if they got sick or became too exhausted to go on, their companies fired them and kept everything.
When one driver could not afford repairs, USA Today reports, “the company fired him and seized the truck – along with $78,000 he had paid towards owning it.” USA Today calls this arrangement a form of “modern-day indentured [servitude].”
USA Today says this practice happens frequently for short-haul truckers, who move shipping containers from port to nearby warehouses or railyards for companies such as Costco, Target, or Home Depot. Such trackers are responsible for “moving almost half of the nation’s container imports out of Los Angeles’ ports.”
Similarly, some companies try to avoid misclassification lawsuits by structuring its arrangement with workers as a profit-share. Often, the company will create an LLC, with the company and worker as joint owners. The company uses the LLC to share the “revenue” generated by the worker. Under this system, workers may lose any guarantee of an hourly wage. Harvard Business Review reports, “In one telling case, construction workers went home at the end of the week as employees only to be informed on the following Monday that, perhaps by the magic of some unknown force, they had become ‘member/owners’ of hundreds of limited liability companies, effectively stripping them of federal and state job protections.”
This practice isn’t limited to construction workers. HBR reports it also affects: “janitors, home health aides, drywall workers, cable installers, cooks, port truck drivers, and loading dock workers in distribution centers.”
Security Alarm Technicians Are Frequent Victims of Misclassification
Security alarm technicians are often misclassified as independent contractors so their employers do not have to pay them for all hours worked. These alarm technicians re often paid on a per-job basis (such as $60 per service call). This flat payment is supposed to cover all the work they do in the home: installing wires, alarm panels, and motion detectors. But alarm technicians are often not paid for all the hours they spend at meetings and trainings, and are not compensated for driving expenses and the wear-and-tear placed on their vehicle. If classified correctly, many states—such as California—would require that they be compensated for all hours worked, including time spent at meetings or being trained on new alarm systems.
California Supreme Court Expands Protection for Workers from Misclassifcation
In a recent case, the California Supreme Court rejected a trucking company’s attempt to classify its workers as independent “owner-operators.” The company, Dynamex, “converted its drivers from employees to independent contractors” in 2004, “to save money,” reports San Diego Union-Tribune. The company suddenly required its drivers “to provide their own trucks and pay their own expenses, including fuel and maintenance costs,” says SDUT.
The California Supreme Court questioned this arrangement and expanded the types of workers who must be classified as employees. The court held that a worker is an employee if he or she is unfree to exercise control or direct over the work, performs work inside the scope of the company’s line of business, or does not customarily engage in an independent occupation or business. The court said that from now on, it will “presume that all workers are employees instead of contractors. The burden is now on any entity classifying an individual as an independent contractor” to prove the classification is correct, says Forbes.
Because Dynamex’s regular line of business was trucking, it would be quite difficult for it to legally classify its drivers as independent contractors or owner-operators.
This ruling, reports the L.A. Times, “could change the workplace status of people across the state.” The Times says, “[t]he ruling is likely to lead many employers in California to immediately question whether should reclassify independent contractors rather than face stiff fines for misclassification.”
The California Supreme Court’s decision was aimed to provide more “clarity” to workers about their proper status, reports L.A. Times.
While the new standard may be more clear cut, it’s never easy to make a legal determination on your own. Contact us for a free, confidential evaluation of your classification status.
Dylan Hughes concentrates his practice on investigating and prosecuting fraud matters on... Steven Tindall has specialized in employment and class action litigation for eighteen... Linda Lam focuses her practice on representing consumers, small businesses, and employees... Steve Lopez represents consumers, employees, and whistleblowers harmed by corporate...
Dylan Hughes concentrates his practice on investigating and prosecuting fraud matters on...
Steven Tindall has specialized in employment and class action litigation for eighteen...
Linda Lam focuses her practice on representing consumers, small businesses, and employees...
Steve Lopez represents consumers, employees, and whistleblowers harmed by corporate...
Speak With an Employment Attorney Regarding Your Claims
Our experienced employment attorneys can help determine whether you have been misclassified as an independent contractor by your employer. Speak with an attorney to learn about your rights and recovery of lost wages.
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Our employment attorneys have been representing classes of employees in state and federal litigation against their employers for over 20 years.
We have successfully litigated employment cases concerning unpaid overtime, meal breaks, and business expenses; employee misclassification; and mass layoffs without proper notice, recovering millions of dollars on behalf of our clients against some of the world’s largest corporations.
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