Independent Contractor or an Employee? The Difference is Huuuge!
Employers regularly disregards the differences between an independent contractor and an employee. Employers be warned. Such disregard could spell trouble and prove extremely costly. First, if the misclassification is intentional, then there are hefty penalties upwards of $25,000.00 which the employer will incurr. Second, and perhaps more importantly, if a plaintiff’s attorney gets a hold of an aggrieved employee who has been misclassified, he or she will have a field day with that case. He will not only sue for a variety of wage and hour violations such as meal breaks, rest breaks, overtime and other similar claims, but he will likely step into the shoes of the Attorney General of the State of California and sue under the Private Attorney General Act, otherwise known as PAGA. Even worse, if the number of employees that are misclassified is high enough then the plaintiff’s attorney may even turn the case into a class action.
For a small to medium size company, this could spell disaster.
Knowing whether one is an independent contractor or an employee can determine whether an individual is applicable to laws regarding minimum wage, overtime, meal breaks and rest breaks. It can determine whether one can receive benefits such as medical care and coverage under the FLSA (Fair Labor Standards Act). Misclassification of an employee by an employer can have severe consequences or penalties for the employer. The penalties for misclassifying an employee as an independent contractor carries a fine of between $5,000 to $25,000 per violation. The employee may also be entitled to collect any unpaid amounts of owed hourly wage or overtime in addition to interest and attorney’s fees due to misclassification.
An independent contractor is a person or business that performs services for another party under a contract between the two parties. (A plumbing business fixing the sink in a house for an individual).
An employee is a person who renders a service for wages or for pay in any business for an employer, regardless of how the pay or wages are measured, whether it is an hourly wage or commission. (An individual working for the plumbing business to fix the sink in the house for the individual).
A key difference between an independent contractor and an employee is that an independent contractor is generally engaged in an independent business and retains the right to control the manner and degree in which he or she performs the contract or task (e.g. how long it takes or the method that he or she uses). Meanwhile, an employee is subject to the absolute control and direction of the employer.
Knowing whether one is an independent contractor or an employee is essential since it can determine fair labor standards that can protect employees by implementing safeguards such as minimum wage and overtime pay. This is also essential for employers to know so the employer knows what rights the individual working for him or her has.
Determining whether one is an independent contractor or an employee for the purposes of the FLSA is not always clear and concise. However, using this three-part test from the recent court case Dynamex Operations West, Inc. v. Superior Court of Los Angeles, can help with deciding whether one is an independent contractor or an employee. This test is called the “ABC test.” Under the “ABC test,” a working individual is presumptively an employee unless all three of the following are met:
(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact(ex: a plumber charges a dental office a standard fee to fix the sink); and
(B) that the worker performs work that is outside the usual course of the hiring entity’s business(ex: a plumber fixes the plumbing in a dental office); and
(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
If any of the following are not met, the individual is considered an employee. If you are an employer and are not sure whether you have properly classified your workforce as an independent contractors, please contact the employment attorneys at Jafari Law Group, Inc. for a free consultation of this and other labor law issues.
Authored by: David Jafari and Kourosh Pishnamaz