For those thinking that classifying workers as independent contractors is a cheaper way of doing business, beware. A California court just ordered a home healthcare business to pay $10 million in restitution and civil penalties for misclassifying its home care workers as independent contractors. The judgment in the case states that the company already was on notice for the misclassification and also had represented to its customers that the workers were actually employees. The misclassification resulted in loss of overtime pay to the workers, loss of workers’ compensation coverage and benefits, and loss of various tax withholdings that were for the benefit of the workers and the state.
Be Sure to Apply the Independent Contractor Test
We blogged recently on the relaxation of the federal independent contractor test under the Trump administration. This is the Department of Labor test that applies to the Fair Labor Standards Act for federal wage issues. As we stated in that post, however, there are other tests for issues arising under other agencies and for issues arising under state law. This California case is a good reminder of the danger of ignoring state law.
The California Test
The California test is simpler and arguably more employee-friendly than most other tests, but it is a helpful guide even if it does not apply to you. It is called the “ABC Test.” Under this test, for a worker to be an independent contractor, all three of these criteria must be met:
- The worker must be free from control of the company;
- The worker must perform work outside the course of the company’s usual business; and
- The worker must be customarily engaged in an independent business of the same nature as the work performed for the company.
While many of our readers will never be subject to this ABC Test, it is a good self-check to use in evaluating the status of a company’s workers.
Takeaways
Do not assume that independent contractor lawsuits and agency audits have gone away — they have not. All employers should evaluate seriously whether this classification route actually is cheaper in the long run.
