Employers must exercise caution when classifying their workers as either employees or independent contractors. Misclassification can lead to significant financial consequences, as one home health care service company recently discovered when the California Labor Commissioner issued citations totaling over $2.3 million for misclassifying its caregivers as independent contractors. This case serves as an important reminder for all employers to ensure their classifications align with both state and federal labor laws.
This substantial penalty is particularly noteworthy because it marks one of the first citations issued under a new California law allowing the state to collect damages on behalf of misclassified workers. Previously, any civil penalties collected from employers were payable solely to the state, but under the revised law, affected workers can now receive financial restitution directly.
UNDERSTANDING THE IMPORTANCE OF PROPER WORKER CLASSIFICATION
California employers should be aware that simply labeling a worker as an independent contractor does not make them one in the eyes of state and federal wage-and-hour enforcement agencies. These agencies apply rigorous legal standards—such as California’s ABC Test and the federal Department of Labor’s 2024 rule—to determine whether a worker has been correctly classified.
Employers who misclassify workers, whether intentionally or inadvertently, risk facing legal action, penalties, and potential damage to their business reputation. Workers who believe they have been misclassified or underpaid also have legal protections that safeguard them from employer retaliation when they report violations or file wage claims.
INVESTIGATION FINDINGS AND PENALTIES
The recent case in California began when the Labor Commissioner’s Office received a referral regarding suspected worker misclassification. Upon investigation, the agency uncovered multiple labor law violations, resulting in the following penalties:
- $422,033 in unpaid minimum wages
- $424,809 in unpaid overtime wages
- $165,162 in unpaid meal and rest period premiums
- $27,400 in wage statement penalties
- $108,094 in waiting time penalties due to delayed final wages
- $550,000 in penalties for willful misclassification of workers
- $81,673 in penalties for failing to provide workers’ compensation insurance to misclassified employees
- $422,033 in liquidated damages
- $18,950 in additional civil penalties
The total amount cited was $2,327,257, which includes accrued interest and further penalties. Of this amount, $2,203,384 is payable directly to the affected workers.
LESSONS FOR EMPLOYERS: HOW TO AVOID MISCLASSIFICATION PITFALLS
The financial repercussions of worker misclassification can be severe, as demonstrated in this case. Employers should take proactive steps to ensure compliance with both federal and state labor laws by:
- Understanding Classification Standards – Employers must familiarize themselves with the legal tests used to determine whether a worker qualifies as an independent contractor.
- Consulting Legal and HR Experts – Seeking legal counsel or HR consulting services can help businesses properly classify workers and avoid costly penalties.
- Regularly Reviewing Worker Status – Employment laws evolve, so it’s essential to conduct periodic reviews of worker classifications to ensure ongoing compliance.
- Providing Training for Hiring Managers – Ensuring that HR and management teams understand classification laws can help prevent inadvertent misclassification.
FINAL THOUGHTS
Employers should view worker classification as a critical compliance issue rather than an administrative formality. Given the costly penalties associated with misclassification, businesses should take all necessary precautions to classify workers correctly. If there is any uncertainty, consulting with legal or HR professionals can provide valuable guidance and help mitigate risks. By taking these steps, employers can protect their business, support fair labor practices, and ensure compliance with evolving employment laws.
JorgensenHR conducts HR audits for legal compliance in the areas of wage & hour, exempt/nonexempt, and employee/independent contractor. Contact us at 661-600-2070 or info@jorgensenhr.com.
Sources include: Katie Culliton, Editor, CalChamber and Fisher Phillips.
Recent Comments