Independent Contractor or Employee? Why It Matters

In 2018, the California Supreme Court adopted the ABC Test for determining whether workers are independent contractors in the seminal case of Dynamex Operations W., Inc. v. Superior Court (2018) 4 Cal.5th 903. That test, generally speaking, is more favorable for workers because it requires hiring entities to prove that a worker (A) is free from the control and direction of the hirer; (B) performs work outside of the hiring entity’s business; and (C) is engaged in an independently established trade, occupation, or business. Otherwise the worker must be classified as an employee.

In adopting the ABC Test, the Dynamex Court noted that misclassification of workers as independent contractors is a very serious problem that, if unchecked, would “depriv[e] federal and state governments of billions of dollars in tax revenue and millions of workers of the labor law protections to which they are entitled.” That statement could not be more true, and this blog post explores just why that is so.

Misclassification deprives workers of their fundamental rights

As a preliminary matter, independent contractors (ICs) are not subject to the same wage and hour laws as employees (EEs). For example, ICs are not guaranteed a minimum wage, overtime, or meal and rest periods. Similarly, ICs do not have the right to a workplace that is free from harassment and discrimination. Nor do ICs have the right a safe workplace, or to form a union.

ICs also generally do not qualify for workers’ compensation if they get hurt on the job, or unemployment insurance if they get laid off.

Misclassification harms women and people of color

Furthermore, misclassification disproportionately harms women and people of color. Think about the industries where misclassification is most common: construction, home health care, shipping and delivery, driver services (like Uber and Lyft), and janitors. Those are also the industries in which women and people of color are disproportionately represented. According to one study, seven out of eight occupations in which misclassification is common are held mainly by women and people of color. See Alexander, Charlotte S., 2017, “Misclassification and Antidiscrimination: An Empirical Analysis,” Minn. Law Rev. 101, no. 3 (February 2017).

Misclassification shifts the burden to state and local governments

When companies convert EEs into ICs, they drastically reduce the amount of money that they have to pay by way of employment-based taxes. For example, employers are required to pay taxes that help to fund Social Security and Medicare. They also have to help pay for unemployment insurance and workers compensation. According to the Economic Policy Institute, these taxes and benefits “can add as much as 30% or more to a worker’s total costs.” See “Misclassification, the ABC test, and employee status” (June 16, 2021, Lynn Rhinehart, et al.

Companies that utilize ICs do not pay into the social safety net in this same manner. As a result, they effectively shift the cost of these important benefit programs to the taxpayers.

The misclassification ripple effect

Finally, misclassification makes it harder for companies that want to do the right thing and pay their employees a living wage. When a company misclassifies an employee as an IC, it gains an unfair advantage over its competitors. Even though it is illegal to do so, those companies are able to slash their overhead. This forces the companies competing with them to also reduce their costs. As a result, misclassification effectively pressures other businesses to follow suit.

The ABC Test and the future fight against misclassification

California is not alone: As of January 2022, many states have adopted the ABC Test. At the same time, companies like Uber, Lyft, and DoorDash have done everything they can to try and avoid treating workers as EEs under the law. This includes ballot initiatives like California’s Proposition 22, which sought to exclude app-based drivers from California’s wage and hour laws. The fight is therefore far from over

If you think that you may be misclassified as an Independent Contractor, please feel free to contact the experienced attorneys at Hunter Pyle Law for a free and confidential intake process. We can be reached at inquire@hunterpylelaw.com, or at (510) 444-4400.