Many businesses have sought to reclassify workers who were once employees to contractor status in order to reap an array of apparent cost-savings and benefits from reduced labor costs. However, the days where this practice was little noticed by government officials is long gone. Today, in California and beyond, the failure to properly classify workers in the construction industry and other industries can lead to government enforcement actions that culminate in significant penalties while occupying a significant amount of your time and negatively impacting morale in your company.
Guidance issued by the U.S. Department of labor (DOL) should place all construction companies and other business owners utilizing independent contractors on high alert. Interpretation No. 2015-1 sets forth the proper method of classifying a worker as an employee or as an independent contractor for purposes of the Fair Labor Standards Act (FLSA). However, as a threshold matter, it is important to note that under the FLSA, “employ” is defined expansively under the guidance of economic reality factors.
The classification of a worker for FLSA purposes should be based on six economic reality factors. These factors are assessed as a whole. These factors are:
The DOL’s overarching inquiry into contractor status is premised on the question of whether the worker is economically independent or actually an independent business. The DOL does find certain factors more compelling than others. For instance, DOL finds the factor assessing whether the work is integral to the business to be particularly persuasive.
Businesses across the nation have faced additional scrutiny regarding labor practices and enforcement measures stemming from the misclassification of workers. Large enforcement actions spearheaded by the IRS and DOL have taken place in Arizona, Utah and Illinois. These enforcement actions frequently resulting hundreds of thousands of dollars in back wages and civil penalties.
While this risk exists nationwide, it is particularly pronounced in California. Labor misclassification in the state is investigated and enforced by the State of California Industrial Labor Relations’ Labor Commissioner. The agency encourages potentially misclassified workers to file a complaint with the Division of Labor Standards Enforcement. Furthermore, in 2011, the California legislature passed Senate Bill 459 which creates civil penalties for individuals and entities who willfully misclassify workers. Under the law, entities can be fined between $5,000 and $25,000 per a violation. Due to the additional focus on worker misclassification at both the federal and California state level, California businesses must tread carefully and should reassess their classification policies and practices before facing an enforcement action.