MISCLASSIFICATION
You May Be Losing Wages Due to Improper Classification
Misclassification occurs when an employer has improperly classified an employee as exempt from receiving certain legal benefits and protections, such as payment of minimum wage and overtime compensation, provision of meal and rest breaks, and unemployment and disability benefits. Some employers may inadvertently misclassify their employees, not realizing that their practices are illegal. However, many employers intentionally misclassify their employees as a way of avoiding their legal obligations and reducing their labor costs. Regardless of whether it is intentional, misclassification can result in workers losing significant amounts of wages and work-related benefits that they are entitled to receive.
There are several ways an employer can misclassify its employees. The most common methods are misclassifying workers as independent contractors, or by incorrectly applying the administrative, executive, or professional exemptions.
Independent Contractors
An independent contractor is an individual who is in business for themselves and who provides specialized services to another company in exchange for compensation. As the name indicates, independent contractors operate largely free of outside control. They are free to pick the projects they work on, perform work for multiple clients, set their own hours and fees, and determine how, when, and where their work is done. In contrast, an employee works under the control of an employer with respect to time, location, schedule, and the performance of their job duties.
Independent contractors are ineligible to receive numerous benefits and protections guaranteed to employees. For example, an independent contractor is not entitled to overtime compensation, health insurance, sick pay, paid time off, unemployment and disability benefits, or worker’s compensation. Independent contractors also have to pay a significant amount of self-employment taxes. Unfortunately, many employers intentionally misclassify their workers as independent contractors in order to reap the savings of not having to pay for these benefits.
California courts generally apply one of two different tests in order to determine if a worker has been misclassified as an independent contractor – the “ABC Test” or the “Borello” Test.
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Generally speaking, California courts apply the “ABC” test to determine if an employee has been misclassified as an independent contractor. Under this test, a worker can only be classified as an independent contractor if they satisfy all three of the following conditions:
• The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for performance of the work and in fact;
• The worker performs work that is outside the usual course of the hiring entity’s business; and
• The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
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Not every job is governed by the “ABC” test. Some positions are evaluated under the “Borello” test, which is more nuanced and considers several additional factors, including:
• Whether the worker performing services holds themselves out as being engaged in an occupation or business distinct from that of the employer;
• Whether the work is a regular or integral part of the employer’s business;
• Whether the employer or the worker supplies the instrumentalities, tools, and the place for the worker doing the work;
• Whether the worker has invested in the business, such as in the equipment or materials required by their task;
• Whether the service provided requires a special skill;
• The kind of occupation, and whether the work is usually done under the direction of the employer or by a specialist without supervision;
• The worker’s opportunity for profit or loss depending on their managerial skill;
• The length of time for which the services are to be performed;
• The degree of permanence of the working relationship;
• The method of payment, whether by time or by the job;
• Whether the worker hires their own employees;
• Whether the employer has a right to fire at will or whether a termination gives rise to an action for breach of contract; and
• Whether or not the worker and the potential employer believe they are creating an employer-employee relationship.
Some of the occupations covered by the Borello test include certain jobs in marketing, insurance, medicine, law, engineering, accounting, securities, and direct sales.
The Administrative, Executive, and Professional Exemptions
Employees who work in administrative, executive, and professional professions may classified as exempt from laws governing minimum wage, overtime compensation, and breaks, provided they satisfy certain criteria. These employees are often referred to as “salaried exempt”, because they are typically paid a salary rather than an hourly wage. However, simply being paid on a salaried basis does not necessarily mean you are an exempt employee. In order to qualify for the administrative exemption, execution exemption, or professional exemption, employees must plainly and unmistakably satisfy specific requirements, as described below
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An employee may qualify for the administrative exemption if they satisfy the following criteria:
1. Their duties and responsibilities involve either:
(a) the performance of office or non-manual work directly related to management policies or general business operations of their employer or their employer’s customers; or
(b) the performance of functions in the administration of a school system, or educational establishment or institution, or of a department or subdivision thereof, in work directly related to the academic instruction or training carried on therein; and
2. They customarily and regularly exercise discretion and independent judgment; and
3. They regularly and directly assist a proprietor, or an employee employed in a bona fide executive or administrative capacity; or
4. They perform under only general supervision work along specialized or technical lines requiring special training, experience, or knowledge; or
5. They execute special assignments and tasks under only general supervision; and
6. They spend over 50% of their working time performing duties that meet the test of the exemption; and
7. They earn a monthly salary equivalent to no less than 2 times the state minimum wage for full-time employment (i.e., 40 hours per week).
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An employee may qualify for the executive exemption if they satisfy the following criteria:
1. Their duties and responsibilities involve the management of the business in which they are employed (or of a customarily recognized department or subdivision of the business);
2. They customarily and regularly direct the work of two or more other employees of the business;
3. They have the authority to hire or fire other employees, or their suggestions and recommendations as to the hiring or firing and as to the advancement and promotion or any other change of status of other employees is given particular weight;
4. They customarily and regularly exercise discretion and independent judgment;
5. They spend over 50% of their working time performing duties that meet the test of the exemption; and
6. They earn a monthly salary equivalent to no less than 2 times the state minimum wage for full- time employment (i.e., 40 hours per week).
All of these criteria must be satisfied for the executive exemption to apply. If even a single factor is not met, the employee does not qualify for the executive exemption.
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The professional exemption applies if an employee meets all of the following 3 criteria:
1. They are:
(a) licensed or certified by the State of California and are primarily engaged in the practice of one of the following recognized professions: law, medicine, dentistry, optometry, architecture, engineering, teaching, or accounting; or
(b) primarily engaged in an occupation commonly recognized as a learned or artistic profession; and
2. They customarily and regularly exercise discretion and independent judgment in the performance of their duties; and
3. They earn a monthly salary equivalent to no less than two (2) times the state minimum wage for full-time employment (i.e., 40 hours per week).
Determining whether an employee falls under one of these exemptions requires a review of the specific job duties performed by the employee. If you have been misclassified as salaried exempt, you may be owed pay for overtime and meal and rest breaks, as well as be entitled to various statutory and civil penalties.
If you believe you have been misclassified by your employer, you should speak with an experienced attorney who can help you determine if your rights have been violated. Parker & Minne specializes in holding employers accountable for unlawful wage theft practices and can help you evaluate your options. Contact us today for a free initial consultation.