$10 Million Judgment Highlights Risks of Worker Misclassification

Heads up, HR pros: Misclassifying workers as independent contractors when they are really employees can end up being an expensive mistake.

For the second time in a matter of months, a state attorney general’s office has recovered millions in a case involving alleged worker misclassification by employers.

As you may recall, in mid-September, the New Jersey Office of Attorney General and the state department of labor announced that the ridesharing service Lyft agreed to pay more than $19 million to settle charges that it had improperly classified more than 100,000 of its drivers as independent contractors rather than employees. That payment included $8.5 million in penalties and interest.

California Issues $10M Worker Misclassification Judgment

Just two weeks later – in early October – California’s attorney general announced a $10 million judgment against a provider of in-home caregiving services that it accused of violating California law by misclassifying in-home care workers as independent contractors rather than employees.

In the lawsuit, filed in June 2023, the California attorney general targeted business partners Benjamin Cabrera and Geoffrey Jimenez, who started a caregiving service business called TLC Home Care Services in 2016. The name was later changed to Care Specialist HCS Inc., which was also named as a defendant in the suit.

The suit said that since the beginning, the business wrongly classified its caregivers as independent contractors rather than employees, a clear example of worker misclassification under state labor law.

Wage Violations Linked to Employee Misclassification

It alleged that the worker misclassification resulted in sometimes egregious underpayment of wages. For example, it said some caregivers were paid as little as $120 a day for working 24-hour shifts, which means they earned just $5 an hour with no overtime pay.

The suit noted that misclassifying employees as independent contractors deprives them of several important benefits, including:

• payment of a minimum wage
• premium pay for overtime
• reimbursement for business expenses
• workers’ compensation coverage
• paid sick leave, and
• wage replacement programs such as disability insurance and paid family leave.

It also noted that under California law, the burden is on employers to overcome the presumption that workers are employees. The burden is met, it explained, when:

• The employer does not control the performance of the work
• The work is outside the usual course of the employer’s business, and
• “The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.”

The defendants in this case clearly did not satisfy that test, the suit said.

Why Workers Qualified as Employees Under State Law

Instead, it alleged that the company’s workers were employees rather than independent contractors because the company:

• hired and fired them
• controlled their access to clients and the shifts they worked
• set job expectations and disciplined workers who did not meet them, and
• set the rates that clients and caregivers are paid.

The company’s written contracts with clients warned that they would have to pay a “minimum liquidation fee” of $15,000 if they hired a company caregiver directly, the lawsuit said.

“The time has come for Defendants’ unlawful employee misclassification scheme to end,” the suit declared.

The lawsuit alleged three separate violations of the state’s labor code requirements. As relief, it sought penalties, costs of suit and an order banning the defendants from continuing to classify the workers as independent contractors instead of employees.

Court Orders $10M Payout for Worker Misclassification

In early October, Attorney General Rob Bonta announced that the state court handling the case had issued a $10 million judgment along with a permanent injunction banning further worker misclassification of the employees.

“Today’s judgment brings long-overdue justice to hundreds of in-home care workers who were denied fair wages, benefits, and basic labor protections,” said Bonta in a press release. “This is a clear message to employers in California: Misclassification is wage theft. If you cheat workers by misclassifying them, you will be held accountable.”

Employee or Independent Contractor? How to Tell the Difference

The federal Department of Labor has issued guidance on the proper classification of workers, and has advised that the question comes down to “looking at the economic realities of the worker’s relationship with the employer.

Another way to look at it: Is the worker in business for himself, or is he economically dependent on the employer for work?

The DOL also identifies factors that should be considered in determining whether a worker is an independent contractor or an employee. These factors include:

• The worker’s opportunity for profit or loss
• Relative investments by the worker and employer
• The degree of permanence of the relationship
• The nature and degree of control exercised by the employer
• Whether the work is integral to the employer’s business, and
• The level of skill and initiative needed for the work.

Indicators of employee status focus on the degree of employer control and how integral the work is to the business:

• The worker maintains an ongoing relationship with the same employer.
• Their work is “critical, necessary, or central to the company’s business.”
• The employer oversees scheduling, performance, and work methods.
• The employer supplies tools, equipment, and workspace.

Bottom line: State regulators are stepping up enforcement, and worker misclassification remains a costly mistake for employers that get it wrong.