Updated: Nov 11, 2022
Employee misclassification In California and how an employment lawyer can help you fix your status.
Misclassification of Employees in California
Employees and independent contractors are the two major groups of jobs in California. The way a worker is categorized for tax purposes has an effect on the IRS tax form that companies must plan. For example, if a worker is identified as an employee, their employer normally must provide them with a completed copy of IRS Form W-2. You can consult an Employment Lawyer in Los Angeles for any concerns regarding this complex case.
On the other hand, independent contractors usually receive a completed copy of IRS Form 1099-MISC from the company that paid them. As a result, many people refer to independent contractors as 1099 staff and conventional employees as W-2 employees in the form of taxation.
Beyond the gaps in documentation, a worker's classification may significantly impact their legal rights. Many legal tests can be used to decide if an individual is an employee or an independent contractor under California law. Although the tests are similar, they are not identical. The rights or responsibilities in question will determine the required test. The following are the most critical tests:
The IRS's "power" test for federal income tax purposes;
The "ABC" exam, which is used in California law for most wage and hour issues
Where the ABC test does not apply, the "manner and means" test is used as a fallback under California wage and hour laws
The "economic realities" test, which federal courts apply
California's anti-discrimination laws
Even though each evaluation is slightly different, the main element in each is the degree of control the hiring team has over the employee. The greater the hiring party's influence, the more likely the worker would be classified as an employee.
Will Form 1099 or W-2 Be Filed for Federal Tax Purposes?
Depending on whether a worker is listed as an employee or an independent contractor, the federal tax responsibilities of employers and companies may differ significantly. The distinction will likely affect self-employment taxes, social security and Medicare withholdings, unemployment taxes, and income tax withholdings.
The classification of a worker has an effect on the forms that companies must fill out. Employers are typically expected to send their employees a completed copy of IRS Form W-2. On the other hand, independent contractors usually receive a completed copy of IRS Form 1099-MISC from the company that paid them.
The Internal Revenue Service (IRS) looks at whether the company has the ability to monitor the facts and means by which the worker conducts his or her job to decide whether a worker is an employee or an independent contractor.
A worker is called an employee if a company has the authority to monitor the specifics of his or her job.
The IRS considers several factors when determining whether a company has adequate influence over how a worker conducts their job to establish an employment relationship. These are some of the factors:
Controlling one's actions.
Even if the employer does not exercise its right of influence, a worker is an employee if the company has the right to control the person's job. This consideration considers who has power over when, where, and how the work is done, as well as the level of guidance and training provided to staff and how the company judges the finished product.
When a company has the authority to monitor the financial aspects of a worker's job, the worker is more likely to be listed as an employee. This consideration considers whether the company pays for the employee's equipment, how the employee's compensation is measured, and whether the employee will win or lose money on the job.
The Parties' Relationship
An aspect is how the worker and the company perceive their relationship. Written contracts detailing the partnership are considered but aren't always definitive. Other facts may be considered, such as whether the company offers insurance or the relationship's longevity.
The most critical of these considerations is behavioral regulation, but none of them is inherently definitive. Instead, the IRS would consider the entire employment relationship and weigh each aspect in light of the facts. The IRS may also take into account factors that aren't mentioned above.
Employees Classification in California
Even if they don't follow the normal employment arrangement test outlined above, some jobs are legally classified as "employees" for the purposes of federal employment taxes. Statutory employees are the staff in question. They may contain the following:
For IRS purposes, drivers who sell or transport foods, vegetables, fruits, bakery goods, laundry, dry cleaning, or drinks other than milk are often called employees.
Agents who sell life insurance.
If agents work full-time selling life insurance or annuity plans exclusively with one life insurance firm, life insurance sales agents are often called employees for IRS purposes.
Salespeople who travel.
Traveling salespeople who work full-time for a company selling resale products or supplies for use in the buyer's business activity can fall under the IRS's statutory concept of "employee."
Workers who work from home.
If they are expected to return such materials or goods to the business, and the business gives specifications for the work to be performed, an individual who works at home on materials or goods provided by a business may be considered a statutory employee for IRS purposes.
If a worker falls into one of these groups, three additional conditions must be met before a company can legally deem them a statutory employee. The following are the requirements: The service agreement must state or indicate that the worker will perform all of the services substantially personally and that the worker will not have a significant investment in the equipment or property used to perform the services (other than a vehicle or truck), and that the services will be provided continuingly for the same company.
If all three criteria are met, and the worker falls into one of the above mentioned categories, the worker must be counted as an employee for federal employment tax purposes. This is valid even though they aren't considered employees in the conventional sense.
Keep in mind that even though this test isn't fully satisfied, the worker will still be classified as an employee if they pass the IRS's standard classification test. In contrast, a worker could meet the definition of a statutory employee for federal tax purposes while still being classified as an independent contractor under California law.
Under federal tax codes, such jobs are classified as "non-employees." Even if workers meet the standard employment relationship test outlined above, they will have this status. Statutory non-employees are staff who are typically treated as independent contractors. Statutory non-employees are divided into three categories:
Real estate agents
If they provide services under a written arrangement that specifies they will not be considered as an employee for federal tax purposes, licensed real estate agents who receive substantially all of their money from sales or other output rather than hours worked are statutory non-employees.
Sellers who sell directly to the public.
Statutory non-employees are people who work in the consumer goods industry, deliver newspapers, or distribute shopping news. Additional provisions, however, are required to satisfy the legal description of a "direct seller," which can be found here.
Someone who looks after children, the elderly, or the disabled is known as a sitter. Sitters who work for a placement service that connects them with potential clients are often not considered employees of the service because the service does not receive or pay the sitter's salaries.
It's worth noting that these categories only apply under federal tax law. A worker is likely classified as a statutory non-employee for federal tax purposes but as an employee under California labor laws.
Under California law, the ABC Test is used.
Wage and hour laws in California offer workers a lot of rights. Generally, those labor laws are more favorable to employers than federal labor laws. As a result, the most common test used to assess if a worker is an employee is the one prescribed by the California statute.
The default rule under California law is that a worker is an "employee" if they perform labor or services for someone else in return for a wage. The recruiting agency is responsible for proving that the worker is not an employee. Only if all three of the following conditions are met can a recruiting body prove that a worker is an independent contractor (rather than an employee):
Regarding how the job is done, the worker must be free of the hiring entity's power and direction.
The worker's labor or services must be beyond the recruiting entity's normal business operations.
The worker must be regularly employed in an independently developed trade, profession, or company of the same nature as the job is done.
Of course, there are exceptions to this rule, but the main point is that California law interprets employment arrangements narrowly to determine whether a worker is an employee or an independent contractor.
A written agreement isn't conclusive.
Importantly, whether a worker is an employee or an independent contractor for legal purposes is not determined by the mark a company puts on them. If the parties have a formal agreement specifying that the worker is an independent contractor, but the parties behave like an employer and employee, the agreement would be ignored by the courts.
Similarly, whether or not a worker is classified as an independent contractor is not determined by whether or not he or she is given a 1099 form for federal tax purposes rather than a W-2 form. Under California law, the legal standard for determining whether an employment arrangement exists differs slightly from the test used for federal tax purposes. In addition, some companies wrongly identify their employees as independent contractors to minimize the costs of employing them.
As a result, many people who claim to be "independent contractors" are simply employees. When a worker is misclassified, they could be entitled to all of the benefits they would have received if they were identified correctly as an employee.
Simply put, the law mandates that staff be regarded as employees if they fulfill the legal meaning of that position, regardless of whether the company calls them that. A person's work title does not determine whether they are employee or independent contractor.
When the ABC Test Controls are Allowed
The ABC test is the most common under California law, but it isn't always the best way to decide whether a worker is an employee or an independent contractor. When three sets of rules are applied, the ABC test provides control:
Code of Labor.
California's Labor Code governs most elements of the employment relationship. These statutes cover the minimum wage, labor law exemptions, hours of service, occupational safety, and other laws.
Orders for Wages.
A set of wage orders defines many work conditions in California. The wage orders, which can be found here, are legally binding. They cover topics such as overtime pay, meal and rest breaks, and some record-keeping provisions.
Code of Unemployment Insurance.
Unemployment insurance is governed by California's Unemployment Insurance Code, as the name implies. Disability insurance, some tax withholdings, the CalWORKs initiative, and other workforce development services are among the topics covered.
If the legal rights provided by any set of rules above are in question, the ABC test would be used to decide if the worker is an employee or an independent contractor for the vast majority of employees. There are, however, exceptions, as with most legal codes. If a court determines that the ABC test cannot be applied in a particular case for any reason, the manner and means test is used as a fallback. Ask an Employment Lawyer in Los Angeles for anything unclear.
A law or regulation can describe what it means to be an employee in some cases. This definition may be in contrast with the ABC test's definition.
The ABC test does not apply if the Labor Code, wage orders, or the Unemployment Insurance Code specifically describe words like "employee," "employer," "employ," or "independent contractor" differently than the ABC test does. Instead, the test defined by those definitions will be used.
The Manner and Means Test is a statistical test that examines how people behave in different situations. Although the ABC test is the most commonly used in California wage and hour cases, it does not always apply. Many licensed practitioners, for example, are exempt from the ABC examination.
When the ABC test fails, the "manner and means" test is the most popular fallback test. This test is also known as the Borello test, after the landmark court case that created it. The main question under the manner and means test is whether an "employment relationship" has been established. When a company employs someone to do something for them, they have an employment arrangement (or the benefit of a third party). The hiring entity may be an individual, a corporation, an agency, or a government body.
The legal concept of the "employer-employee relationship" is a little hazy. As a result, California courts have established a more precise test: When the company has the right to regulate the manner and means of achieving the desired result, an employment relationship exists. The manner and means test is another name for this.
The manner and means test's main concern is how much influence the recruiting company has over how a worker performs their job. The worker will be called an employee if the company has the right to exert a high level of control over them. An independent contractor arrangement is formed if the company only has the right to manage the outcome of the job (not the method by which it is completed).
Simply put, the more power a company has over how a worker performs their job, the more likely the worker will be identified as an employee. If a company, for example, can monitor the specifics of how a job is completed rather than just the end result, they are likely to be considered an employer.
Importantly, to be called an employer, a company does not have to directly influence how a worker performs their job. The only requirement is that the company has the right to do so under the terms of the parties' agreement. The right of control of the company may be specified explicitly in a written contract or implied by the nature of the work. Your Los Angeles Employment Lawyer can give you more in-depth advice on this complicated matter.
Other Factors to Think About
It may be difficult to determine who has the authority to direct the manner and means of completing a task. As a result, courts will weigh several secondary considerations before making a final decision:
Is the employee under supervision?
Independent contractors are free to do their job in whatever way they choose, using whatever tools they choose. If an individual is expected to follow a company's policies, is monitored, or is given work orders, they are likely employees.
Is it possible to fire a worker at any time?
If a company has the ability to terminate a worker at any time, the worker is likely an employee. However, if an individual is an independent contractor, they usually cannot be fired unless the contract terms are met or violated.
Is the job a regular part of the company's operations?
Employees typically do work that is part of a company's daily line of operation. A shoe salesperson in a shoe shop, for example, is almost certainly an employee since they help in the business's daily operations.
Is there a different company that the employee runs?
It is proof that a worker has a separate business if he or she promotes himself or herself as being able to provide services for more than one organization. Employees have fewer options than independent contractors when it comes to accepting jobs from several companies.
Is the employee in charge of making business decisions?
An independent contractor is someone who can make their own business decisions, especially ones that include the risk of losing money or a chance to benefit. Employees do not typically buy furniture, rent an office, invest in ads, or purchase insurance with their own money.
Is the employee responsible for their own equipment?
Employees are rarely needed to have their own machinery, materials, or supplies, nor are they required to operate in a specific area. On the other hand, independent contractors also invest in the tools they use to complete the job. When a company provides the necessary resources for the job, the worker is more likely to be classified as an employee.
How long do you think the job will take?
In most cases, employees are employed for an unspecified period of time. On the other hand, independent contractors are often hired on a job-by-job basis for a set period of time.
How is the employee compensated?
Employees are often paid an hourly wage or a fixed salary. On the other hand, independent contractors are typically compensated at a set rate per project or task completed. In addition, once a project is finished, independent contractors typically submit invoices to companies.
Is the employee a professional worker?
Under California labor laws, workers who perform unskilled or semi-skilled work are more likely to be classified as workers and thus entitled to full security.
Did the company give the employee some training?
Independent contractors are typically self-employed and do not need preparation. If a company trains employees who do the same job, it can be used to prove that a worker is an employee.
What was the nature of the parties' relationship?
Courts will consider how the parties represented their relationship on occasion, but not always. Courts are more likely to find an employment arrangement whether the worker or company thought they were forming an employee-employer relationship.
When considering these variables, the courts should not follow a rigid formula. Instead, they look at the relationship as a whole and treat the factors differently, assigning different levels of significance to different factors based on the facts of the case.
If a court is still uncertain whether a worker is an employee or an independent contractor after considering these factors, they will normally assume the worker is an employee. Given this, it may be prudent for companies to err on the side of caution and treat their employees as employees if their status is in doubt. A Los Angeles Employment Lawyer will know more about this and can give you advice on the matter.
Even in the absence of control, employment may exist.
A corporation does not have the power over how work is done in some cases, but a court may still find that an employer-employee relationship exists.
When three conditions are met, this may occur: The company maintains overall control of the process, the worker's job duties are an important part of the operation, and the nature of the work precludes thorough control. Cab drivers, for example, can be considered workers under this law if they provide an essential service to a cab company and all three criteria are met.
Cases involving workers' compensation
Employees in California who have been injured at work may be entitled to compensation or benefits under the state's workers' compensation laws. The Division of Workers' Compensation (DWC) in California oversees workers' compensation claims.
In workers' compensation cases, the procedure used to assess whether an employment arrangement occurs is essentially the same as the test used in other California cases. The California Supreme Court, on the other hand, has stated that the workers' compensation statute should be interpreted liberally in favor of compensating injured workers. As a result, certain courts will consider other considerations when hearing cases.
In workers' compensation cases, courts can take into account the following factors:
The aim of workers' compensation legislation is to help people who have been injured on the job. The citizens are supposed to be governed by the rules, If any particular legislative exclusions apply, as well as the parties relative bargaining positions (taking into account the parties' mental states, economic power, and educational attainment).
In workers' compensation situations, these considerations appear to support a conclusion of an employment relationship. It's unclear whether courts would take them into account in other cases.
California Law Regulates Specific Occupations
According to California law, the ABC test does not extend to several professions or contracting partnerships. The "manner and means" test is commonly used to assess whether the worker is an employee or an independent contractor.
The main exceptions to the ABC test will be discussed in detail in this chapter. There are, however, a plethora of potential exceptions—many of which are nuanced and open to various interpretations—and not all of them are addressed here.
If you're unsure whether an exemption exists, you can speak with an Employment Lawyer in Los Angeles.
Professionals in the Insurance Industry
Instead of the ABC test, such employees approved by the Department of Insurance are subjected to the "manner and means" test. Staff who perform underwriting reviews, premium audits, risk management, or loss control work for the insurance and financial services industries fall into this category.
The "manner and means" test is often used instead of the ABC test in the following professions: Physicians and surgeons, dentists, podiatrists, psychologists, and veterinarians are all examples of professionals.
Two requirements must be met for this exception to the ABC test to apply: (1) the worker must be qualified to conduct their work by the State of California, and (2) the worker must perform clinical or medical services for a "health care agency."
Any sole proprietorship, partnership, or professional corporation specified in section 13401 of the Corporations Code may be considered a healthcare agency.
Professionals who are licensed
The "manner and means" exam applies to workers in the following occupations that have an active license from the state of California:
Lawyers, Architects, Landscape Architects, Engineers, Accountants, or Private Investigators are all examples of professionals who work in the legal field.
Staff in the Securities Industry
If all of the following apply and they fall into one of the categories mentioned below, those staff in securities and investments are subject to the "manner and means" test:
They are Securities and Exchange Commission (SEC) licensed.
The Financial Industry Regulatory Authority has them on file.
The state of California has granted them a license to sell shares and provide investment advice.
The following individuals are exempt from the ABC test:
Broker-dealers in securities
Advisers on investments
Securities broker-dealers' and investment advisors' agents and members
Providers of Professional Services
Instead of the ABC test, people who provide such professional services under the contract are subjected to the "manner and means" test. However, six conditions must be met for the manner and means test to be valid:
The location of the business.
The worker must maintain a different business location from the recruiting entity's business location. This location does not have to be the worker's home; the worker can conduct services at the hiring entity's location as long as they have a business location separate from the hiring entity's.
Filings for businesses
The worker must have those materials if the work is being done in a jurisdiction where a business license or business tax registration is required.
Employees must be able to set or negotiate their own rates for their services.
Except for project completion dates and fair business hours, workers must be able to schedule their own hours.
The worker may have already done the same work under contract with another recruiting agency or hold themselves out to other prospective clients as being willing to do the same work.
In the performance of the services, the client uses discretion and independent judgment regularly.
Members of the professions mentioned below may be subject to the manner and means test if these requirements are met. It's worth noting, however, that many of these occupations have their own meanings. So, if you're unsure if an occupation counts as a "professional service," you can seek legal advice.
Human resource administrators
Travel agent services
Authors of grant proposals
Agents who are authorized to work for the Internal Revenue Service.
Agents who handle payments
Photographers, photojournalists, videographers, and photo editors are all types of photographers.
Authors, translators, editors, copy editors, illustrators, or newspaper cartoonists who work freelance.
Contributors to publications' material, consultants, producers, narrators, or cartographers
Estheticians, electrologists, manicurists, barbers, and registered cosmetologists have also licensed professionals.
Specialized performers are recruited for a master class that lasts no more than a week.
Skilled foresters who are licensed and registered
These, once again, have legal definitions. So, if a worker might fall under one of these categories, it's critical to read the statute carefully to decide on the required test.
Contractors who are licensed
Workers who provide services requiring a California contractor's license are considered employees. Employees are supposed to be those who work for someone eligible to obtain a contractor's license.
The duty of evidence is shifted to the company receiving services under this assumption. This means that businesses seeking to identify their employees as independent contractors would have to prove in court that the employees were indeed independent contractors based on the standard test and factors outlined above.
Businesses must also show that the worker's position as an independent contractor was not used as a ruse to avoid classifying him or her as an employee. An Employment Lawyer in Los Angeles could help explain the details.
Salespeople who work directly with customers
Instead of the ABC test, those direct salespeople are subjected to the "manner and means" test. For these purposes, a worker must meet the concept of "direct sales salesperson" outlined in section 650 of the Unemployment Insurance Code, as well as all three criteria for exclusion listed in section 650.
In addition to the occupations mentioned above, California law applies strict rules and definitions to decide whether a worker is an employee or an independent contractor. There are some of them:
Business-to-business outsourcing partnerships that are genuine
Real estate licensees
Singular event contractors
Professionals in the music business
Aggregators of data
Salespeople for manufactured homes
Individuals hired as part of a global exchange visitor network
Judges for the competition
Contractors for motor clubs
Consult an Employment Lawyer in Los Angeles if you have any concerns about how the law can be enforced in a particular situation.
The "Economic Realities" Test of the Federal Government
California labor laws, as previously stated, are usually more favorable to employers than federal labor laws. As a result, California companies should use the California test to decide whether a worker is an employee or an independent contractor for the majority of purposes.
However, in some cases, companies or employees could be forced to litigate the matter in federal court. The "economic realities" test is the most widely used test when this occurs. Since economic conditions, not contractual names, decide a worker's employment status for most purposes under federal law, it is called this name.
The economic realities exam, like other studies, focuses on the business's right to monitor the worker's job output. When a worker has complete discretion of how they do their job, they are classified as an independent contractor. However, if a company has the right to manage the worker in that respect, the worker is considered an employee.
Federal courts, like other examinations, look at various variables to see if the required level of control exists to form an employment relationship. The economic realities test's considerations contrast with California's manner and mean test in several respects. The following are some of the questions:
What level of expertise is needed to do the job?
Who is responsible for the cost of the instruments and equipment used for the job?
What is the location of the work?
How long do you think the business partnership will last?
Is it legal for the company to delegate the worker to additional projects?
How much power does the company have over when and how long must the work be completed?
What factors go into determining a worker's pay? Is it because of the job? How about by the hour?
Is the worker responsible for providing his or her own assistants when necessary? Or does the company supply them?
Is the job party part of the hiring party's daily business?
Is the company providing compensation to the employee?
What is the tax treatment of the relationship between the parties?
This is not an exhaustive list of causes. As a result, federal courts can consider other relevant factors when applicable. Furthermore, none of the variables can decide whether or not an employment relationship occurs on its own. Instead, federal courts will consider all of the relevant facts in the sense of the business relationship.
Finally, the economic realities test places a premium on the substance of the relationship between the accused employer and the hired party over its appearance. As a result, if the job performance indicates an employment relationship, courts can ignore any agreements or tax filings relied on by the parties.
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