Misclassification Red Flags to Watch Out For

Workers deserve every benefit and right owed to them. Unfortunately, some employers will try to cheat the system and deny workers the full benefits of employment. 

The misclassification of employees as independent contractors is problematic in the modern workplace and can be an intentional strategy to deprive workers of their rights and benefits and lower a business’s payroll taxes.

Take this example. Daniel recently applied for a position as a CDL driver for a logistics company. The job description said it paid $30/hour, so Daniel was very happy when the employer reached out to him and told him that he could have the job. 

The employer told Daniel the position will require him to file a 1099 form and that he will be an independent contractor. The employer told Daniel that he will use the company truck and trailer and will need to work a 9 am – 5 pm, Monday – Friday schedule, with some longer days when needed. However, there will be no benefits, overtime pay, or paid time off. And Daniel is not sure that he will get reimbursed if he incurs additional necessary expenses on the job.

Daniel was confused. It sounded like the job should be a regular W-2 employee position, not an independent contractor position. He voiced his concerns to the employer, but they insisted that Daniel will make more money this way.

Red Flags That May Indicate Misclassification

In this example, there are three main red flags that indicate this employer is trying to misclassify Daniel as an independent contractor:

  1. Daniel would be required to use the company’s equipment.
  2. The employer would set Daniel’s schedule every week.
  3. Daniel’s salary would be determined by the employer.

If this job was truly an independent contractor position, Daniel would:

  1. Use his own truck and trailer.
  2. Set his own schedule.
  3. Charge the employer for the work.

There are other criteria that a worker must meet in order to be considered a true independent contractor. Employees who do not meet these standards are likely eligible for overtime pay and benefits. 

To determine if a California worker is an employee rather than an independent contractor, employers must use a three-pronged test, commonly known as the “ABC test.” According to the test, a worker should be considered an employee if they:

  • are under a company’s direct control,
  • are engaged in its usual course of business, or
  • don’t operate their own independent business.

All three prongs must be satisfied in order to legally classify a worker as an independent contractor. This ABC test was codified in California legislation known as AB5, for Assembly Bill 5. After the law was enacted, certain industries tried to challenge it in the courts. In late June 2022, the U.S. Supreme Court declined to accept two cases challenging AB5, one from the California Trucking Association and another from freelance journalists. For now, at least, it looks like AB5 is here to stay, as of this blog’s publication time (July 2022), with no indication that the U.S. Supreme Court will ever decide to weigh in.

Bottom line: California law makes it hard to classify workers as contractors rather than employees.

Do Independent Contractors Make More Money Than Employees?

The logistics company tried to tell Daniel that he would make more money if he worked on a 1099 compared to an employee W-2. While Daniel’s take-home pay may be slightly higher every week, it does not account for the taxes that Daniel will be responsible for paying at the end of the year. If the employer forces Daniel to work longer days, he would not qualify for overtime pay. Daniel will also be responsible for paying for private healthcare and benefits since the company will not contribute to a benefits plan. 

Independent contractors do not enjoy the same benefits and protections as employees. They often have no access to healthcare or dental plans. They do not qualify for disability insurance if they become injured, nor unemployment benefits should they be laid off or terminated.  

Some of the benefits that an employer owes to their employees include: 

  • Family and medical leave 
  • Minimum wage 
  • Overtime compensation 
  • Safe workplaces 
  • Unemployment insurance 

Some people argue that classifying workers as independent contractors gives the workers more flexibility. But it’s not true flexibility if you’re earning low wages, working unpredictable schedules, or don’t have job security. 

Misclassification Hurts Everyone

Minors, seasonal laborers, and migrant workers with limited English proficiency often face misclassification and low wages because of a lack of understanding of their rights in the workplace, or fear of retaliation.

Misclassification hurts workers, and it also hurts taxpayers and the federal and state governments. This is because it contributes to lower tax revenue. A substantial loss is associated with this tax issue and a significant negative impact on state unemployment insurance and workers’ compensation funds. Misclassification could also lead to expensive penalties from the tax authorities, such as the IRS and California EDD.

Our Employment Attorneys Can Help

If you suspect you have been misclassified by your employer, our employee rights attorneys at Valerian Law can help you exercise your rights and seek compensation for this wrongdoing. If you have any questions about employment rights, call us at 888-686-1918 to speak with one of our employment attorneys today.