Misclassification of Employees As Independent Contractors

Many low-wage workers in California and across the country are treated and paid by their employers as independent contractors, but are in fact employees under the law.  When an employer treats somebody who is an employee under the law as an independent contractor, the employer is “misclassifying” them.  This fact sheet explains:

(1) why misclassification hurts low-wage workers;

(2) how to tell if you should be classified as an employee;

(3) how to tell how your employer is classifying you;

(4) steps you can take if you have been misclassified; and

(5) how to learn more about misclassification and your rights.

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(1) Why does misclassification matter?

Misclassification matters because there are a number of legal benefits to being an employee.  These benefits are available even if your employer has improperly labelled you as an independent contractor.

1. Employees have access to important benefit programs, including unemployment insurance, disability insurance, paid family leave, and workers compensation.

Employees have access to state disability benefits and paid family leave benefits.  Independent contractors for the most part do not have access to these benefits programs, although some contractors can pay into the state system for paid family leave and disability insurance.

2. Employees have protections at work, including the right to a minimum wage and overtime pay.

Employees also have many other rights that true independent contractors do not have, including:

1. the right to get paid back (reimbursed) money spent on necessary business expenses, like the cost of driving a personal car during the workday, or the cost of using a personal phone for the employer’s benefit;
2. the right to take rest breaks and meal breaks during their workdays;
3. the right to get paid at regular intervals, and the right to have detailed information provided on your pay stub;
4. the right to take paid sick leave;
5. the right to quit your work at any time; and

f. for many employees, access to health benefits through the Affordable Care Act and other laws.

3. Employees save money on payroll taxes.

Independent contractors have to pay additional self-employment taxes that add up to over 7.5 percent of their pay.  A full-time employee making the state minimum wage saves over $2,250 a year in payroll taxes compared to a similarly paid independent contractor.   Independent contractors also have to pay taxes to the state and the IRS on a quarterly basis, which can be complicated and lead to costly penalties if done improperly.

(2) Wait, don’t I need to be classified as an independent contractor to have flexible hours, work part-time, or freelance for multiple businesses?

No, employees can have flexible work schedules, just like independent contractors.  Many employees work part-time, from home, and under flexible working arrangements.  Freelancers are regularly hired as temporary or part-time employees.

(3) How do I know if I’ve been classified as an independent contractor?

There are a number of ways you can find out how your employer is classifying you:

1. Look at tax forms provided to you by the company or person you work for.

If you receive a W-2 form from your employer, than you are classified as an employee.  If your wages are reported on a 1099 or 1099-MISC form, then you are classified as an independent contractor.

2. Look at forms provided to you at hiring.

When you were hired, if you received an I-9 form to verify your employment eligibility, or a W-4 form to calculate your tax withholdings, you were classified as an employee.  If you received a W-9 form, or no form at all, then you are more likely classified as an independent contractor.  Also look at any written contract provided to you to see if it says how the company classifies you.

3. Look at your paystub.

If deductions are taken out of your paycheck for federal payroll, Social Security and Medicare taxes, and state payroll and state disability (sometimes labeled as CA SDI) taxes, then you have been classified as an employee.  If your employer is not withholding any of your paycheck to make tax payments on your behalf, it is more likely you’re being classified as an independent contractor.

(4) How can I tell whether I should be classified as an employee or an independent contractor?

For most workers, you should be considered an employee under California law unless your employer can answer “yes” to all of the following three questions:

1. Is the worker free from the employer’s direction and control in connection with the performance of the work?
2. Is the worker doing work that is not part of the usual course of the employer’s business?
3. Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed?

If the answer to any of those questions is “no,” than the worker is an employee.

This test, called the “ABC” test, applies to most, but not all, low-wage workers, including workers in the following industries: janitorial, housekeeping, domestic industries, restaurants, retail, warehousing.  And most low-wage workers should be classified as employees under this test.

Some types of workers need to apply a different test, called the Borello test, including doctors, lawyers, and certain providers of professional services.  Other workers, including direct sales salespersons, and licensed barbers, manicurists, cosmetologists, and estheticians, and certain construction industry subcontractors, may have to apply the ABC test or the Borello test depending on different characteristics of their employment.[1]

Certain app-based ridesharing and delivery workers are considered independent contractors under Proposition 22, but have certain limited additional benefits. For a gig worker to qualify as a contractor under Proposition 22, the company hiring the worker must allow the worker to reject specific ridesharing or delivery requests, must not require a minimum number of hours on the company’s platform, and must allow workers to perform ridesharing and delivery services for multiple platforms.

[1] Under the Borello test, a worker is an employee if the employer “right to control the manner and means of accomplishing the result desired.”  A court will look at a number of factors to answer this question, including whether the employer (a) controls the location of the work, (b) controls the hours worked, (c) provides tools for the work, and (d) was able to discharge workers at will.  The court will also be more likely to find that a worker is an independent contractor if (1) the type of work is normally done by independent contractors, (2) the work requires a special skill, (3) the work is usually done by a specialist without supervision, (4) the work is “a distinct occupation or business,” (5) the work was paid by the job, not by the hour, and (6) the work is not a core or integral part of the employer’s business.

(5) What can I do if I’ve been misclassified?

All workers should maintain detailed records of hours worked and money paid by your employer.  There are many different options for workers who have been misclassified as independent contractors, depending on how misclassification has affected them.

If you haven’t been paid for all the hours you worked, haven’t been paid minimum wage or overtime premiums, or have experienced other labor violations, you can file a wage claim with the Labor Commissioner’s Office.  You can file a claim in person at your closest Labor Commissioner’s Office, or by filling out the required forms at home and sending them in by mail or email.

If you think you might need help with your situation, you can call Legal Aid at Work’s Workers’ Rights Clinic to discuss your situation in greater detail.

(6) What can I do if I need to access unemployment insurance benefits, paid family leave, or state disability insurance?

Apply for unemployment benefits, disability benefits, or paid family leave.  You can file for unemployment benefits by fax, over the phone, or at the Employment Development Department’s website.  We suggest that you maintain records of you pay from your employer, and we also suggest that if possible you write or tell the Employment Development Department when you apply for benefits that you believe that you were misclassified as an independent contractor.  Unfortunately, it may take a while to receive benefits, because the Employment Development Department won’t have records of your employment and your employer may argue that you were properly classified as an independent contractor.  For more detailed instructions, read our How-To Guide: How to Ask EDD to Investigate Additional Wages for Your Claim.

(7) What can I do if I received a 1099, but I want to file my federal and state taxes as an employee?

You can request that the IRS determine whether or not you’re a worker for federal law purposes by filing a SS-8 form. (Please note, the tests for determining whether you’re an employee under federal law are different than the tests discussed above.)  You may also use form 8919 when filing your taxes.  Before filing these documents, you should speak to a tax professional and a lawyer, especially if you are still employed by the employer that has misclassified you.