Your “Independent Contractors” Are Probably Employees — and That’s a BIG Problem…

I know, I’ve written before about mis-classifiying workers as independent contractors, when legally they are really employees. I wrote in more detail about that here. So why am I back on that topic? For one thing, it’s not going away, and it’s not likely to any time soon. The IRS, the USDOL and their State counterparts won’t let go, because the more employees, the more money in their coffers. Employees are more likely to receive benefits, such as medical insurance, which can result in a savings to the federal and state governments — and the taxpayers. I’ve also written about some specific employers who’ve made this mistake and paid for it. Today I’m going to focus on two other employers who are also paying, but there’s a difference. Read on and you’ll see…

In the first case, the California Labor Commissioner’s Office fined a Termecula nail salon a cool $1.2 million for misclassifying and failing to properly pay 36 workers. The breakdown is as follows: $670,040 to the workers for minimum wage and overtime violations, and $572,187 in civil penalties. The penalties include $160,000 specifically due to the misclassification. This case specifically focused on wage theft. I’ll come back to this point in a bit. I want to first focus on what makes this case a bit different from the others I’ve written about previously.

Apparently one or more workers (or someone on their behalf) filed a complaint through the Private Attorneys General Act with the CA Labor and Workforce Development Agency, which in turn referred the matter for investigation. The investigation led to an audit of 40 months of business records. Here’s what they found: the 36 workers were paid for each service performed, rather than for the total hours worked. It gets worse. These misclassified employees often worked 9.5 to 10 hours a day, and more than 40 hours a week, resulting in them receiving far below minimum wage. They also did not receive overtime or meal or rest breaks.

Crossing the country to the District of Columbia, the Attorney General there sued two staffing agencies and a staffing buyer (a client company), claiming they misclassified at least 535 workers as independent contractors. Power Design, Inc is a national electrical contractor, and like many others before it thought it would save money and avoid legal responsibilities by classifying their workers as independent contractors. Power Design was the primary client for both staffing agencies, JVA Services, LLC and DDK Electric Inc.  Power Design (and presumably the staffing companies along with it) could face millions in penalties under the Workplace Fraud Act. The Attorney General is seeking between $1000 and $5000 per employee. (I know, ca-ching!). Of note here is that the Workplace Fraud Act only applies to construction workers and it requires companies in most circumstances to classify their workers as employees. To classify a worker as an independent contractor the construction company must show that: a) the worker is typically self-employed; and b) the work s/he is performing is not within the core business of the construction company. In other words a worker hired to do construction work for the construction company, under this law cannot be an independent contractor.

OK, I said I’d tie it all together, and I will. In the cases I’ve written about on this blog, more often than not the employer could at least point to something that could have argued in favor of the workers being an independent contractor (See my post on Sleepy’s and Uber here ). In these cases the violations were blatant. The companies in question were not even trying to comply and could not possibly argue that any applicable factors pointed to independent contractor status. For example in the nail salon, the workers could not have had other clients if they worked as much as 10 hours a day for this one nail salon. Regarding the construction workers, at the very least they would be W-2 employees of the staffing firms. Moreover, the Workplace Fraud Act made it very clear they were employees and not independent contractors.

If you only walk away with a few points, it should be these:

• Don’t get cute!!! (I used to say this to my kids and I say it to employers). If you’re trying to get all the benefits and none of the responsibilities of having employees, you will eventually pay — big time and no one’s going to feel sorry for you!
• If your company uses a staffing agency or it is a staffing agency, it is likely you are joint employers of all workers the staffing company supplies to the client company. That means if a staffing company supplies workers to a client company and they are misclassified as independent contractors, both the staffing agency and the client company can be held liable for the misclassification.
• Misclassification of workers is wage theft and can lead to criminal penalties on that basis alone. That is in addition to penalties for not covering them under your workers’ comp policy, and it will often be in addition to the actual unpaid wages and overtime.
• In addition to the federal laws, each state has its own laws on this issue. You need to be aware of the laws in every state where you have people working for you.

I think you get the point so I’m stepping off the soapbox for now. See you next week.

Contents of this post are for educational/informational purposes only, are not legal advice, and do not create an attorney-client relationship. Consult with competent employment counsel in the state(s) in which you employ people with your specific questions.

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