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Misclassification: Fight for Fair Pay (2024 Lawsuit Guide)

An employee misclassification lawsuit occurs when an employee believes that their employer has incorrectly classified them as an independent contractor rather than an employee. This misclassification can have significant implications for the worker, as employees are entitled to certain benefits and protections under employment laws that independent contractors are not.
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C.L. Mike Schmidt Published by C.L. Mike Schmidt

Employee Misclassification Explained

According to Wikipedia, misclassification of workers as independent contractors is a significant issue both in the United States and other countries, often leading to what is known as false self-employment [1]. In the U.S., misclassification can have implications for tax treatment and compliance with the Fair Labor Standards Act.

The U.S. Government Accountability Office (GAO) reports that the IRS claims to lose millions of dollars in uncollected payroll, social security, Medicare, and unemployment insurance taxes because of the misclassification of independent contractors by taxpayers.

Employers are required to report the income of employees using IRS Form W-2 and the income of independent contractors using Form 1099. Employers must pay various taxes, including Social Security and Medicare taxes, and unemployment taxes for employees. These taxes are generally not paid for independent contractors, who are instead responsible for their own self-employment taxes.

Worker classification also impacts eligibility for unemployment benefits. In many states, independent contractors are not eligible for unemployment benefits because no contributions have been made to the unemployment insurance fund on their behalf. Employers without employees are often exempt from making payments to the unemployment insurance fund.

How Can Employees Be Misclassified?

According to the SCLG, misconceptions abound regarding worker misclassification, with many assuming it only occurs as independent contractors [2]. While this is a common scenario, misclassification can also happen with exempt employees, each carrying its own set of challenges.

Different state laws use different definitions of what it means to be an “independent contractor.” Many, including California employment law, use the “ABC test.” Under this test, you are presumed to be an employee – SCLG stated.

According to this test, you’re presumed to be an employee unless you:

  • Are free from the employer’s control and direction regarding work performance, both contractually and practically.
  • Perform work outside the employer’s usual course of business.
  • Engage in an independently established trade, occupation, or business similar to the work performed for the employer.

In general, independent contractors control their work methods, while those who hire them control the work product. Employers must adhere to state labor laws and the Fair Labor Standards Act (FLSA) for employees, including paying them via W-2 forms, providing minimum wage, overtime pay, breaks, workers’ compensation, and more.

Misclassifying employees as independent contractors can lead to issues with IRS tax withholding and who pays Medicare and Social Security taxes, allowing employers to benefit from employee-like control without the associated costs.

Exempt employee misclassification involves categorizing workers as exempt rather than non-exempt. Exempt workers are exempt from state wage and hour laws and typically fall into categories like executive, administrative, professional, computer professional, doctors, public employees, and outside salespeople. Non-exempt workers, on the other hand, are entitled to minimum wage, overtime pay, and breaks.

Misclassifying non-exempt workers as exempt can occur to avoid paying overtime, highlighting the complexity and importance of proper worker classification.

Can I File an Employee Misclassification Lawsuit?

You might be asking yourself, “Can I take legal action against my employer for misclassification?” If your employer is not providing you with the required wages or benefits based on your employment status, you may have grounds for a misclassification lawsuit.

Signs that could indicate misclassification and support a lawsuit include:

  • Not receiving benefits despite being treated as an employee in other aspects.
  • Being compelled to work overtime without proper compensation.
  • Receiving a 1099 form while your employer tightly controls your work schedule or methods.

However, a misclassification lawsuit typically doesn’t cover dissatisfaction with your benefits package or feeling undervalued in your compensation.

Don’t let a contract seemingly in favor of your employer discourage you from consulting with an employment lawyer. An employment contract does not dictate the outcome, and your misclassification claim can still proceed even if the contract labels you as an “independent contractor” or an “exempt” employee.

Factors influencing the damages awarded for misclassification of employees and the total amount your employer may have to pay include how long you were deprived of rightful pay and whether your employer’s actions were intentional or part of a recurring pattern. If willful conduct is found, your employer might have to pay additional civil penalties.

Employee Misclassification Statistics

According to The Economic Policy Institute 2023 research, employers who misclassify workers as “independent contractors” instead of “employees” are exposing those workers to economic costs and depriving them of fundamental labor rights [3].

A 2022 analysis by EPI of 11 commonly misclassified jobs highlights the impact of independent contractor status on these workers. For example, a typical construction worker, classified as an independent contractor, could lose up to $16,729 per year in income and job benefits compared to what they would have earned as an employee. Similarly, a typical home health aide could lose up to $9,529 per year in income and job benefits.

Occupations such as landscapers, truck drivers, home health aides, janitors, and nail salon workers are particularly at risk of misclassification. Many of these jobs already have relatively low median annual earnings, so allowing employers to exploit loopholes in labor law further jeopardizes the economic security of these workers.

Policymakers at the federal, state, and local levels should act to crack down on misclassification and enforce the rights to which all workers should be entitled.

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