Protecting California and San Diego Business and Employers

The liabilities for misclassifying independent contractors can threaten the viability of most California businesses.  This liability exists regardless of whether employees have been mistakenly or intentionally misclassified.  What are the new A-B-C rules associated with this important issue and what is the financial risk in this equation for California and San Diego businesses?

New A-B-C Rules for Determining Independent Contractor Classification in California

Have You Heard About the ABC Test for Independent Contractors

The California Supreme Court recently issued a decision which constitutes a major change regarding the classification of workers in California:

All workers in California are legally presumed to be employees.  The legal burden of proof of classifying a worker as a 1099 worker or independent contractor now falls upon the employer.

This important and landmark decision implemented the “A-B-C Test.”  If a provider of work anywhere in the State of California wishes to classify a worker as an independent contractor or 1099 they must be able to prove the following:

  • “that the worker is free from control and direction over performance of the work both under the contract and in fact.” and
  • “that the work provided is outside the usual course of the businessfor which the work is performed,” and
  • “that the worker is customarily engaged in an independently established trade, occupation or business.”

If the worker contributes in any way to the products and or services provided by the employer to their customers, and or doesn’t have their own separate company with it’s own separate book of business they will fail the A-B-C test.

Civil Penalties to the State of California for Misclassification

The misclassification of employees as independent contractor exposes the alleged employer to a civil penalty of $5,000 to $25,000 for each violation (which amount do YOU think they are assessing in most cases?). The law also prohibits companies from charging fees to or making deductions from any and all compensation paid to misclassified workers.

Unpaid Wages, Overtime, Employee Expenses and Other Employee Payments, as well as Unpaid Payroll and Unemployment Taxes

A San Diego Shareholder Dispute Is About Your MoneyCompanies who have been found to have misclassified independent contractors are exposed to substantial financial liabilities for a look-back period of four years, including but not limited to:

  • Unpaid Federal, State and Local Income Taxes
  • FICA (Social Security) and Medicare Contributions
  • Unpaid Minimum Wages and Overtime Wages
  • Unpaid Work Related Expenses
  • Unpaid Sick and Vacation Pay
  • Unpaid Workers’ Compensation Premiums

This is one of the largest sources of expense in a misclassification case. In most cases, this amounts to a six figure settlement for each affected worker.

There have been many instances where the financial impact of this element of compensation alone has caused severe stress on a company if not it’s outright closure. The penalties for misclassification from unpaid wages and associated benefits and payroll taxes is a back-breaking element of California’s employee misclassification laws.

Listen to our Recent Sound Business Insights Podcast:
Episode 28 – Common Employer Disputes and Defenses”

Watkins Firm Sound Business Insights - Episode 28 – Common Employer Disputes and Defenses

ERISA Employee Benefits

Liabilities arise from misclassified independent contractors, who (as employees) would have been entitled to coverage under ERISA employee benefit plans that have not been provided group health, disability and life insurance coverage, as well as anticipated matching contributions to retirement plans such as a 401(k), pension or profit-sharing plan.

Affordable Care Act (ACA)

The Affordable Care Act creates another potential liability for businesses who misclassify independent contractors.  For example, if the business in question has fewer than 50 employees, but the addition of the number of misclassified independent contractors exceeds that number after they are reclassified by the IRS or a California agency, the ACA would require that business to provide qualifying medical coverage to “all” of its employees.  This determination can also affect the determination that the business is in fact a “large employer” who is subject to the excise tax for specific workers who receive subsidized health insurance coverage through “Cover California” or another state or federal exchange.

Private Attorneys General Act or PAGA Lawsuit

Defending a San Diego Employer in any Dispute - Employer DefenseThe misclassification of employees as independent contractors or 1099 workers opens the door to a massive Private Attorneys General Act or PAGA Lawsuit.  Plaintiff’s attorneys will have extensive powers of discovery to contact and seek personnel and payroll records for all current and former employees.  This opens the door to a substantial class action lawsuit which extends your company’s exposure from a single employee or small group of employees to a much larger class.

The Watkins Firm provides extensive employer defense in PAGA cases. The good news for employers in most PAGA actions is there are actions you can take in an immediate timeframe which can substantially reduce or mitigate your financial exposure in these cases and remove the incentive for plaintiff’s attorneys going forward.  You have a limited time (less than 30 days) to take action so it is important to contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.

Labor Contractors and Staffing Companies

misclassification of employees as independent contractors

California has recently enacted a law that creates financial liability for businesses that utilize labor contractors and temporary staffing companies.  Your business shares all civil responsibility and liability with the labor provider for proper classification, payment of wages, provision of workers’ compensation coverage and other employment related exposures.

Your business has a fiscal and legal responsibility to monitor labor providers to ensure that they understand and implement appropriate compensation programs for independent contractors.

Examples of California Employers Who have Paid Substantial Penalties for Misclassification

Recently, the California Labor Commissioner’s Division of Labor Standards Enforcement (DLSE) ordered a logistics company to make a $2.2 million payment to cover back wages, attorneys’ fees and interest for allegedly misclassifying seven short-haul drivers.  The same office assessed $1.5 million to two janitorial businesses for allegedly misclassifying 52 workers.

Contact Experienced California Employer Defense and Misclassification Litigation Attorneys

The Watkins Firm has served the Southern California and San Diego business communities for more than 40 years.  We help our employer clients to develop and implement employment policies and procedures and employee handbooks that are in full compliance with Federal, State and local laws and regulations for decades.

We also represent and defend business clients and employers in litigation associated with wage and hour issues, as well as discrimination, retaliation and harassment related lawsuits.  Come into compliance and protect yourself and your company from civil penalties and financial liabilities associated with employment misclassification.

We invite you to review the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.