What are the risks of misclassifying a person as an employee versus a contractor?

Those that have misclassified an employee as an independent contractor may be subject to adverse consequences, including:

• having to pay unpaid minimum wage and overtime amounts, with interest, typically going back three years in California if the violation was not willful and four years if the violation was willful (and longer in certain states, such as New York, which has a six-year statute of limitations);
• having to pay back withholding of taxes (state, federal, and FICA) with interest going back three years under California law;
• civil penalties, including, in California, penalties for not providing itemized wage statements or affording workers prescribed meal and rest periods;
• statutory penalties, including, in California, penalties for failure to timely pay wages when due and not providing itemized wage statements;
• individual civil liability (rare but possible), including unanticipated tort liability to third parties and wrongful discharge liabilities; and
• individual criminal liability (rare).

Directors and officers can be held personally liable for unpaid wages.

With respect to civil penalties, specifically, employers who violate the California Labor Code’s wage-and-hour requirements, including those that arise from misclassification of independent contractors, may face a lawsuit pursuant to the Private Attorney’s General Act (“PAGA”). The PAGA allows an aggrieved employee to collect civil penalties for each Labor Code violation. The civil penalties are assessed per violation, per employee, going back one year from the date the aggrieved employee submitted notice of the lawsuit to the employer and pertinent state agency. The aggrieved employee may represent other employees even if they experienced a different Labor Code violation the aggrieved employee never experienced or hold different job positions and/or duties than those held by the aggrieved employee. In other words, a PAGA lawsuit is akin to a class action lawsuit for civil penalties, except that it does not have to meet many of the procedural hurdles that stand in the way of aggrieved employees in a class action lawsuit. In addition to a PAGA lawsuit, aggrieved employees can also bring class action claims to recover owed wages for a class of workers, including interest and liquidated damages. 

As described above, companies often fail to appreciate the significant penalties associated with misclassification. Therefore, prior to retaining and classifying an individual as an independent contractor, we recommend contacting any member of the employment or trade secrets litigation practices at WSGR.

---

The answer provided is for general informational purposes only, does not constitute legal advice, and may be considered attorney advertising in some jurisdictions. Prior results do not guarantee a similar outcome. For more information, see the site’s Terms of Use.