Independent contractor misclassification can hurt your creative business or startup. There is no way of being less blunt about this. This is especially true in a state like California, where employment law is very favorable to employees. If you are an independent contractor being misclassified, you are losing out on benefits that you would otherwise gain from being an employee. If you are an employer classifying employees as independent contractors, you are exposing yourself to some enormous liability.
IMPORTANT: See the January 2020 update at the end of this article.
Photo by Brett Jordan on Unsplash
What Is Independent Contractor Misclassification?
Independent contractor misclassification means claiming that people who should have been classified as employees as independent contractors. The dividing line between independent contractors and employees is not always clear and varies from state to state and from agency to agency. Here are some things to know, in general:
- A contract might not change things. Some people think that if there is a contract that says that the worker is an independent contractor, that settles it. It doesn’t resolve it – the court tends to look right past what the words say and at the reality of the situation.
- If someone looks like an employee, they might very well be. As I said, several factors will determine if someone is an employee, but if someone working for you works from your office, uses your equipment, works exclusively for one person, or has set hours (among other things), then it’s time to give the issue a little thought.
- Unusual things can make an independent contractor into an employee. In California, a work for hire agreement can turn an independent contractor into an employee.
As always, if you have questions about this, the best move is to speak to an attorney in your state.
Why Is Independent Contractor Misclassification A Problem?
Independent contractor misclassification is a problem for employers because it subjects them to liability from both misclassified employees and various state agencies. For instance, state agencies like the California Department of Industrial Relations might take issue with the fact that workers are not being paid for overtime, meal, and rest breaks. Other agencies might take umbrage with the fact that the employer isn’t paying worker’s compensation (that’s a criminal offense, by the way) or withholding taxes properly. All of those things add up to big bucks spent on lawyers, judgments, and penalties that could be put to better use building a business or product.
Independent contractor misclassification is a problem for those who are misclassified because they miss out on legal protections that all employees are entitled to, such as overtime, unemployment insurance, minimum wage protection, paid breaks, and worker’s compensation. In essence, these burdens fall on the misclassified workers’ shoulders rather than the employers’. This is why many statutes involving worker misclassification give misclassified employees relatively sizable awards.
Independent Contractor Misclassification In Tech and Creative Businesses
Unfortunately, independent contractor misclassification runs rampant in both technology startups and creative businesses. There are a variety of reasons for that; startups and new businesses want to keep overhead low by classifying workers as independent contractors, and many people are willing to accept that classification because they are looking for a chance to get their “foot in the door.”
Additionally, some tech startups have built business models that rely upon independent contractors – and now people are starting to get wise to it. For an example of that, read about the unfortunate case of San Francisco startup Handy – they were sued by a group of workers who Handy had classified as independent contractors, but who allege that they were employees. I can’t comment on either Handy or the merits of the case. Still, I can say that no matter what, they will have to divert a reasonable amount of time and energy to defending themselves – and potentially have to pay significant judgments to the plaintiffs.
In both the technology and entertainment fields, a premium is placed on keeping overhead low by claiming that employees are independent contractors. While this may save some money in the short term, it can wreak havoc on a business should the misclassified employees or state or federal authorities get wind of things.
I predict a pretty big shakeup in the area of worker misclassification in the tech and creative industries in the coming year or two, just as we have been seeing with unpaid interns. This is why both employers and employees in the creative and tech sectors must begin to understand how the law will treat the employment relationship.
BONUS: On the copyright front, the determination of whether someone is an employee or a contractor matters. Work for hire agreements function primarily based upon whether someone is an employee or contractor and any uncertainty about where someone falls could muddy the waters of who owns a copyright.
As an employer of any size, it would make sense to talk with an attorney in your state to know what to do to avoid running afoul of the various employment laws. A couple of hundred bucks spent early on can avoid five to six-figure headaches down the road.
Employees and independent contractors would also do well to understand their rights and learn about what remedies are available if they are being misclassified.
Finally, this is a hugely important issue and one that can be enormously expensive if gotten wrong. So don’t rely solely on this article (or anything else that you find on the Internet) – hire an attorney in your jurisdiction to get real legal advice. And as always, I am not your lawyer, and this article is provided for informational purposes only. If you do have questions, however, you are welcome to get in touch.
Update – January 2, 2020: California AB5 changes independent contractor law in California. Make sure that you understand these changes when considering how you classify independent contractors.
