EMPLOYEE MISCLASSIFICATION – A PERVASIVE FORM OF EMPLOYER EXPLOITATION

When you hear the term, “exploited workers” the first image that comes to mind is an immigrant worker who receives less than minimum wage for exhausting labor; workers who have no rights. However, there is a much more insidious form of “exploitation” known as “misclassification.” The practical results are the same – if a person is classified as an “independent contractor”, that person has virtually no rights, and can be paid less than minimum wage. Oddly, most people will not contest their classification, because they would rather have an income. This article is a follow-up to our previous article “So you are an Independent Contractor – Maybe?”, and will go into greater detail.

This article will discuss: (1) statistics relating to “misclassification”, (2) the legal tests to determine whether someone is an employee or an independent contractor, (3) common causes of actions an “employee” can bring if they were misclassified as an “independent contractor”; and (4) a specific example of a case that was brought on behalf of an individual who was misclassified as an “independent contractor.”

(1) Statistics on Misclassification

The Labor Commission handless all allegations of worker misclassification, and provides the misclassified individual the right to file a complaint against their employer.

There are approximately 10 million individuals who are deemed independent contractors across the United States. This represents a 20% increase over the last six (6) years. According to the U.S. Government Accountability Office “independent contractors” made up 6.7% of the total workforce in 1995, and grew to 7.4% in 2005. The average age of the “independent contractor” is 46, and is comprised of males at twice the rate as females. Misclassification is estimated to result in the loss of payroll tax revenue in the amount of $7 billion per year.

A person who is classified as an “independent contractor” as opposed to the proper classification of “employee” is not subject to California’s minimum wage and overtime protection laws. Further, the “independent contractor” is not eligible for worker’s compensation, they are not entitled to family leave, they do not receive unemployment insurance, they have no right to join a union, and they have no protection against retaliation from their employer. Many employers are aware of the reduced cost of hiring someone as an “independent contractor”, and seek to exploit workers by improperly classifying them as “independent contractors.” These efforts to “game the system” will continue until enough employers are held accountable. California has taken steps to begin that process.

On September 8, 2011, the California Legislature passed Senate Bill 459, which was later codified in California Labor Code §226.8 to provide exploited workers with a weapon against opportunistic employers. The statute prohibits the “willful misclassification of an individual as an independent contractor.” Willful misclassification, in turn, is defined as “voluntarily or knowingly misclassifying an employee as an independent contractor.” The statute also prohibits an employer from charging the improperly classified individual a fee, or from making deductions from their pay for any purpose that would have been unlawful if the worker had been properly classified. Each violation of 226.8 carries a fine ranging between $5,000 and $15,000. Naturally, the reader is now wondering, “how do I tell if I am properly classified as an ‘independent contractor?’”

(2) How to Determine Whether or not you are an Independent Contractor

On March 23, 1989 the California Supreme Court decided the case of S.G. Borello &Sons, Inc. V. Department of Industrial Relations. This case lists a number of factors, which should be weighed against each other, in light of the total circumstances. Once the factors have been weighed, a determination can be made regarding whether an individual is an “employee”, or an independent contractor. These factors include:

1. Whether the employer has the power to exercise complete and authoritative control of the mode and manner in which the work is performed.

This factor is by far the most important factor in determining whether or not an individual is an employee or an independent contractor. This is frequently called the “right to control” test. 

1. 1. 1. EXAMPLE: A maid, who charged $16 a day was improperly classified as an “independent contractor” because her employer brought her to a vacant apartment he managed, instructed her on what to clean, and provided her with the equipment necessary to complete the job. Johnson v. Workmen’s Comp. Appeals Bd.
2. How much skill is required to perform the task the worker has been hired to perform.

Frequently, independent contractors perform highly specialized tasks, whereas an employee performs general tasks that can be performed by nearly anyone.

1. Whether the worker is engaged in a distinct business or occupation.

Where the worker is performing a task pursuant to his distinct business or occupation, it is likely that they are an “independent contractor.”

1. Whether the employer supervises the worker.

When the worker is performing tasks under the direction and supervision of the employer, they are likely an “employee.” However, if the worker is a specialist, who performs their tasks without supervision, it is likely that they are an “independent contractor.”

1. Whether the employer provides the tools necessary for completing the task.

If the worker utilizes their own equipment to complete the task, it is likely that they are an independent contractor. In contrast, if the employer provides the tools, the worker is likely an “employee.” This is a corollary to the “right to control” test; this was also a consideration in Johnson v. Workmen’s Comp. Appeals Bd.

1. How long the task takes.

Independent contractors typically provide services on a task-by-task basis, whereas an employee performs ongoing tasks. For example, an independent contractor would fix the pipes in an apartment whenever a pipe broke. An employee would be the “maintenance man” at an apartment complex. The distinction is subtle, but important.

1. How the worker is paid.

When a worker is paid by the job, that indicates that they are an independent contractor. When the worker is paid a regular wage, that indicates that they are an employee.

1. Whether the work is part of the regular business of the employer.

Where an employer requires the worker to perform tasks that are similar to the employer’s regular business, the worker is likely an employee. In contrast, if the work being done is not part of the employer’s regular business, they are likely an independent contractor.

1. 1. 1. EXAMPLE: Eddie owns a plumbing company, and hires Paul to fix the bathroom in one of his client’s homes. This is part of Eddie’s regular business, and this factor would suggest that Paul is an employee. If Eddie asked Paul to fix the air conditioning in the same house, the factor would point towards Paul being an independent contractor, since air conditioning is not part of Eddie’s business.
2. Whether the employer and worker subjectively believe they are creating an employer-employee relationship.

While none of these factors are dispositive, if they generally point towards being

an “employee” and you are classified as an “independent contractor”, California Labor Code §226.8 may be applicable. Further, if you are improperly classified as an “independent contractor”, you may have a cause of action against your employer for a number of common violations. The next section will briefly discuss common causes of action a misclassified employee can bring against their employer (note that employees can also bring the same causes of action, it is simply more common for those violations to occur when the employer does not believe you are entitled to those rights).

(3) Common Causes of Action for the Misclassified “Independent Contractor.”

1. Wage and Hour Violations

When an employee is misclassified as an “independent contractor”, the employer

mistakenly believes that the they do not have to comply with California’s Wage and Hour laws, which is codified in California Labor Code §510. The statute requires the employer to pay an employee pursuant to the following rules:

• If an employee works eight (8) hours or more in a workday, the employer must pay the employee 1.5 times their hourly rate for each hour the employee works beyond the eight (8) hours during that day.
• If an employee works more than forty (40) hours in a week, the employer must pay the employee 1.5 times their hourly rate for each hour the employee works beyond the forty (40) hours that week.
• If an employee works seven (7) days in a row, the employer must pay the employee 1.5 times their hourly rate for the first eight (8) hours worked on their 7^th day of work.
• If an employee works twelve (12) hours or more in a workday, the employer must pay the employee 2.0 times their hourly rate for each hour the employee works beyond the twelve (12) hours during that day.
• If an employee works seven (7) days in a row, the employer must pay the employee 2.0 times their hourly rate for the first eight every hour beyond eight (8) hours on their 7^th day of work.

1. Wage Statement Penalty

California Labor Code §226(a) requires that every employer shall, semimonthly

or at the time of each payment of wages, furnish each of his or her employees, either as a detachable part of the check, an itemized wage statement, showing all wages paid, including all deductions.

If your employer has mistakenly classified you as an “independent contractor”, instead of “employee”, there is a strong chance they have failed to comply with the provisions of §226(a)

While this is hardly an exhaustive list of causes of actions the misclassified

“independent contractor” can bring against their employer, these are two of the most common examples. The next section will apply everything that has been discussed in this article, in the context of an actual case.

(4) A Specific Example of a Misclassification Case – Trauth v. Spearmint Rhino Companies Worldwide, Inc.

Employers frequently classify exotic dancers as “independent contractors”. The practical effect of this classification is to reduce costs in the form of not being required to comply with many portions of California’s Labor Code. This class action against Spearmint Rhino Companies Worldwide, Inc. settled for $13 million in 2012. This is not to say that all cases will end this way, it serves to show that employment law provides misclassified individuals with a weapon to motivate companies to refrain from exploiting their workers.

In the Spearmint case, an exotic dancer claimed that she had been misclassified as an “independent contractor.” The misclassification resulted in her not receiving any wages, not receiving other benefits and rights that are afforded to employees, and forcing her to split tip income with other employees.

To support her claim that she was misclassified, the Plaintiff alleged that Spearmint had complete control over the dancer’s work-environment, and employed guidelines regulating: (1) hours of operation, (2) length of shifts the dancers must work, (3) the show times when the dancers may perform, (4) minimum table dance tips, the sequence in which the dancers could perform, (5) the format and themes of the dancer’s performance (including costuming and appearance), (6) conduct while at work, (7) pay tip-splits, (8) “tip-outs” to other employees; and (9) the minimum number of drinks the dancers must serve to the patrons (if they did not meet this minimum, they would have to pay for the drinks themselves).

While there are numerous allegations as it relates to each factor the Court considers in determining whether an individual is an “independent contractor” (See (2) How to Determine Whether or not you are an Independent Contractor), this will suffice for the purpose of applying real-word facts to the Court’s analysis.  If you recall, the “right to control” test is the most important factor the Court’s look to. Based on the dancer’s allegations, it is clear that Spearmint had absolute control over the dancers; they had absolutely no control over how they performed their work. As such, it is clear that the dancers were “employees” of Spearmint, and not “independent contractors.”. The California Labor Code provides certain rights and protections to “employees”, an employer who seeks to avoid these requirements is engaged in exploitation.

If you believe that you have been misclassified as an “independent contractor”, and have been denied basic rights guaranteed to you by California Labor Law, contact Yeremian Law at (818) 659-8331 immediately. No employee should be exploited, and the attorneys at Yeremian Law will vigorously advocate for your rights.