Here's How Not to Get Fined $25,000 in California

3 min read
Sam Nedimyer
Sam Nedimyer, Manager, Digital Content
October 15, 2018
Here's How Not to Get Fined $25,000 in California

A ruling by the California Supreme Court changed the way independent contractors are classified in California, making it much more difficult for employers to put employees under that label.

In the ground-breaking decision, the Supreme Court unanimously announced a new “ABC” test for determining whether a worker is an employee or an independent contractor. In short, workers are assumed to be full-time employees unless all three of these factors can be proven:

(A) that the worker is free from the control and direction of the employer in connection with the performance of the work, both under contract to perform such work and in fact

(B) that the worker performs work that is outside the usual course of the employer’s business; and

(C) that the worker is usually engaged in an independently established trade, occupation, or business of the same nature as the work performed for the employer.

Businesses that fail to comply could face fines anywhere from $5,000 to $25,000.

The ruling will have a significant impact given the proliferation of the gig economy in California, said Jim Evans, an attorney with Alston & Bird in Los Angeles.

Employees are generally entitled to certain benefits under California law — such as minimum wages, overtime pay, and meal and rest breaks — whereas independent contractors are not. The new test may make it easier for independent contractors to claim that they have been misclassified and are entitled to such benefits.

"Employers in California should expect much tougher standards in litigation asserting misclassification of independent contractors," Evans said.

"Class-action litigation challenging independent-contractor classifications has become fairly common, especially for companies in the sharing economy," he added.

Read: How One California Company Adjusted to Recent Freelancer Ruling.

The growing trend of worker misclassification has been one of the biggest storylines within the rise of the freelance economy. Since 2013 more than one-third of mid-size U.S. businesses have been fined or penalized for non-compliance, according to ADP.

Recently, a direct mail company in Virginia paid $743,443 in back wages and liquidated damages to 73 employees to resolve violations of overtime and recordkeeping provisions of the Fair Labor Standards Act.

Within the last two years, a number of leading businesses have experienced a surge of lawsuits alleging worker misclassification, including Amazon, Uber, and FedEx.

As California employers grapple with the state high court's new misclassification test, they will need to review their current business relationships and utilize technology to ensure everyone is properly classified as either an employee or an independent contractor.

To learn more about how some California businesses are creatively responding to the recent ruling and how you can use those best practices, email [email protected]. To request more information or get a free consultation from one of our workforce experts, click here.

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