When California companies misclassify employees as independent contractors, the government does not receive payroll taxes to fund Social Security and Medicare, and workers are denied rights to overtime pay, family and medical leave, unemployment insurance and the minimum wage. Misclassification is taken very seriously by the U.S. Department of Labor, the Internal Revenue Service and the California Department of Industrial Relations, and companies that break the rules can face severe penalties.
The employees and independent contractors
The key factor the authorities use when determining whether a worker is an employee or an independent contractor is the amount of control the employer has over how and when work is done. Independent contractors are in business for themselves and can work for several companies, while employees are expected to work at specific times and perform specific tasks. Employees are usually employed on a permanent or long-term basis, while independent contractors are normally hired to complete temporary assignments. Employers control how work is done and set pay rates and schedules, while independent contractors decide for themselves how their tasks should be completed.
The penalties for misclassification in California
Companies in California that misclassify employees as independent contractors can face wage and hour claims filed by misclassified workers as well as penalties imposed for violating state employment laws. They can also be ordered to pay civil penalties of up to $25,000 for each violation when misclassification is deemed to be willful.
Not worth the risk
Misclassifying workers saves companies money because it allows them to avoid employer payroll taxes. However, these savings are more than offset by the harsh penalties they will face if their activities are discovered. Workers denied overtime pay and the minimum wage can file complaints in person, on the phone or by email, which means misclassification is likely to be discovered sooner or later. Severe penalties and straightforward reporting procedures make misclassification a risk not worth taking.