Employers may misclassify workers inadvertently when they do not understand California law. They may also misclassify them deliberately to avoid many of the protections available to employees.
Understanding the employee misclassification penalties can guide employees in seeking the benefits and protections they have lost due to their employer’s acts.
An employee misclassification lawyer from ARCH Legal can advise you about your rights and the compensation you can seek, including lost pay. Learn about the legal consequences of employee misclassification and the remedies misclassified workers can seek.
What Employee Misclassification Can Cost California Workers
Employee misclassification can take two forms. The first is characterizing employees as independent contractors. The second happens when a business classifies employees eligible for overtime as exempt from overtime pay.
When employers correctly classify workers, they create a fair tradeoff intended by California and federal laws. However, an employee misclassified as an independent contractor gets the worst of both worlds.
The employer gains total control over the work they perform as if they were an employee. However, they lose the legal and financial protections they deserve under the law.
When a worker is correctly classified as an employee, they would be entitled to the following benefits:
- Family leave protections and benefits
- Payment of the employer’s share of payroll taxes
- Workers’ compensation coverage
- Unemployment insurance benefits
Furthermore, non-exempt employees receive minimum wage, overtime, meal periods, and rest periods.
Mischaracterized employees lose these employee benefits. Additionally, the state suffers lost tax revenue that would have otherwise been paid by the employer.
California Penalties Employers May Face for Employee and Independent Contractor Misclassification
Mischaracterizing workers is illegal under California law. A company found to violate the law can face several employee misclassification penalties.
Civil Penalties Under California’s Labor Code
California law allows both civil and criminal penalties for employers who misclassify employees. A civil penalty is similar to a criminal fine because it is imposed by the government for a legal violation.
However, since the penalty is purely financial, the state only needs to prove the violation by a preponderance of the evidence rather than beyond a reasonable doubt. This lower standard makes it easier for the state to prove a violation and obtain a penalty order against an employer.
The civil penalties for misclassifying employees in California depend on the nature of the violation.
Regardless, the employer will still be liable for amounts owed for taxes, back pay, overtime, and other expenses that the employer avoided by its conduct.
If the state proves that the violation was willful, it may seek a civil penalty of $5,000 to $15,000 per violation. These employer penalties for worker misclassification are imposed on top of any tax or wage liabilities.
Under the lower standard for civil actions, willfulness is proven by showing that the employer more likely than not voluntarily and knowingly misclassified the worker as an independent contractor to avoid employee status.
The state can pursue a harsher penalty by proving that the willful misclassification was a pattern or practice by the employer. This increased penalty can range from $10,000 to $25,000 per violation.
These penalties are imposed in addition to requiring the employer to pay payroll taxes and any unpaid minimum wages and overtime.
Along with the monetary penalty, the state requires employers to post on their website that they committed a misclassification of employees in California and that anyone who believes they were misclassified can contact the state’s Labor and Workforce Development Agency.
Civil Penalties Under the Fair Labor Standards Act
The Wage and Hour Division of the U.S. Department of Labor enforces the Fair Labor Standards Act (FLSA). This act, in combination with the Internal Revenue Code, requires employers to properly classify employees.
When they fail to do so, they face federal penalties. Specifically, the federal government can seek a civil penalty of $1,000 per violation for willful or repeated violations of the FLSA.
These penalties can be imposed regardless of whether the state also penalized the business. In other words, a company can be penalized at both the state and federal levels.
Criminal Penalties Under State and Federal Laws
The state and federal governments can also pursue employee misclassification penalties in criminal court. Criminal cases are not necessarily limited to California labor law employee classification violations. If the government brings a criminal case, it may include tax evasion, fraud, filing false reports, and other criminal charges.
Fines for criminal FLSA violations could be up to $10,000 per incident. Additionally, the Internal Revenue Service will pursue back taxes. Multiple violations could result in imprisonment.
California employee misclassification fines depend on the charges. For example, a prosecution for misclassification to evade workers’ compensation requirements can result in a $10,000 fine for a first offense and a $50,000 fine for a second or subsequent offense.
In addition to any California worker misclassification fines imposed, the court can also order the company to pay investigative costs.
How Employee Misclassification Investigations and Enforcement Actions Begin
Cases can begin in many ways due to the various effects misclassification can have on workers. For example, a worker may be injured in an on-the-job accident. When they file a workers’ compensation claim, the insurer and the state may discover that the employer misclassified the worker.
Another possible trigger for an investigation happens when the employer underpays the worker or refuses to pay time-and-a-half for overtime. The worker files a wage complaint with the state, and the state determines that the employer misclassified the worker.
The state may also learn about misclassifications from whistleblowers within the company. Importantly, California protects employees who report misclassifications to the state from retaliation by the employer.
The Tax and Financial Consequences Employers May Face After Misclassification
One reason employers misclassify employees is to save money. They can avoid withholding taxes and paying the employer’s share of payroll taxes due. Moreover, they often pay lower workers’ comp premiums and avoid overtime.
When the state enforces the California employee vs. independent contractor rules, it will typically pursue three remedies.
First, the state will try to recover any amounts not paid as a result of the misclassification. Thus, the employer may be ordered to pay unpaid taxes, unemployment insurance benefits, investigative costs, and court costs. These amounts may be subject to interest.
Second, the state will impose penalties and fines permitted under the law to deter the employer from future violations. These penalties may be ordered by a judge or imposed as part of a settlement agreement between the state and the employer.
Third, employers will be liable for any amounts owed to workers as a result of the violation. These amounts may be recovered by the agency. However, in some cases, workers must file civil lawsuits in California courts to recover their damages.
What Compensation Can Workers Recover After Being Misclassified?
California and federal government agencies have the power to order companies to pay compensation to workers harmed when the employer fails to comply with the federal and California independent contractor classification laws.
Minimum Wage
Employers are generally required to pay employees the state minimum wage. If you were paid less than minimum wage, you can seek reimbursement.
Overtime Pay
Independent contractors are not entitled to overtime pay. However, non-exempt California employees are entitled to overtime pay when they work more than eight hours in a day or 40 hours in a week.
Overtime pay is one and a half times the worker’s normal wage, although it may increase to double the worker’s normal wage under some circumstances. If the employer committed wage and hour misclassification violations, you can seek back pay for unpaid overtime.
Business Expenses
Since independent contractors are self-employed, they are usually responsible for paying any expenses associated with their tools, supplies, and workplaces. However, employers are usually responsible for providing these to employees.
If your employer misclassified you and charged you for tools, supplies, or workplace rental, you may be entitled to reimbursement.
Benefits
California labor laws require employers to provide employees with intangible benefits, such as paid sick leave and paid rest breaks.
Additionally, the employer’s policies may entitle employees to other optional benefits, such as health insurance premiums and retirement contribution matching. Workers can seek compensation for the value of any denied employee benefits.
Attorney’s Fees
A court can order the employer to pay the worker’s attorney’s fees. This award is meant to remove the costs of legal representation as a barrier to filing employment misclassification lawsuits.
Legal Options Available to California Workers Who Were Misclassified
Workers have two primary routes for enforcing their misclassified employee rights in California. First, the worker can file a complaint with the California Department of Industrial Relations. The agency will investigate the claim and order the employer to pay any amounts due if the employer violated the law.
The drawback of an administrative complaint is that the investigation and hearing process can take a long time. Moreover, an administrative order might not cover all your losses. For example, you usually cannot recover consequential damages beyond what your employer owes you, such as emotional distress or job search expenses.
Second, you can file a wage and hour lawsuit against your employer. The benefit of this option is that you have complete control over your case rather than relying on the state’s investigators. Moreover, you can seek full compensation for all losses caused by the misclassification.
Warning Signs That a Worker May Have Been Misclassified Under California or Federal Employment Law
For most workers, the state determines whether to impose California independent contractor misclassification penalties by using the ABC test. This test, formally referred to as the AB5 independent contractor law, starts with the presumption that the worker is an employee.
The burden then falls on the employer to prove that the worker was an independent contractor by proving that all of the following factors apply:
- A: The worker is free from the employer’s control and direction in how they perform their work.
- B: The worker’s tasks fall outside of the employer’s normal business.
- C: The worker is customarily engaged in a trade that is normally treated as independent.
If the employer fails to prove one or more of the factors, the worker is considered an employee. In applying the test, courts and agencies are not limited to the terms of any employment contract. Instead, the law examines the actual employment relationship.
Example Application of the ABC Test
Many professions can straddle the line between independent contractor and employee. For example, suppose you work as a graphic designer. If you work for a manufacturing company on a project basis and are only provided with objectives and a deadline, you are probably an independent contractor.
Your job falls outside of the company’s business, you have control over how you perform your work, and many graphic designers work as freelancers.
However, if your employer were an advertising agency that worked closely with you to produce the final product for presentation to the agency’s client, you might be an employee. The employer exercises control over your work, and your work falls within its normal business.
How an Employee Misclassification Attorney Can Help Protect Your Rights
Employees may be entitled to significant compensation when an employer misclassifies them. An attorney can explain the worker’s rights and their options for seeking remedies. The attorney can seek evidence from the employer and attempt to settle the dispute without pursuing a complaint or filing a lawsuit.
If the employer refuses to settle, the attorney can represent the worker’s interests before the state labor commissioner or in court.
Contact ARCH Legal to Discuss Your Employment Misclassification Case
Employers face many legal consequences of employee misclassification. These consequences can include the payment of damages to employees who were misclassified. Contact us to discuss how we can help you pursue employee misclassification penalties against your current or former employer.
