Employee misclassification is a chronic issue that affects many California workers. Misclassification creates legal exposure for companies and risks shutting legitimate employees out of benefits and legal protections.
The problem of misclassification
Misclassification is when a worker is wrongly treated as a contractor when they are actually an employee. This means that they are not required to be offered health care or retirement benefits and lose out on some employment protections related to termination and workplace conditions. Contractors are also taxed differently from employees because the contractor bears a greater share of income taxes than an employee does. Companies sometimes misclassify employees in order to avoid the cost of these benefits or make the workers easier to fire. Sometimes misclassification happens by mistake as well.
The harm that it causes
State and federal laws provide for identifying and managing cases of misclassification. Due to California’s large population and the prevalence both of large tech companies and gig economy workers, there are strict definitions of what workers qualify as contractors. The penalties for misclassification can be significant, especially if the employer was found to be doing it on a large scale or if they did it on purpose. Additionally, companies face misclassification oversight at the federal as well as state level, which means two different standards of classification for compliance.
When a company misclassifies an employee as a contractor, it is illegally depriving that worker of workplace protections and benefits as well as passing on a large tax burden. State and federal laws forbid the practice and provide guidance on how to properly classify workers into the proper categories.