(Updated Nov. 30, 2017)

The misclassification of employees as independent contractors is a major concern for America’s workforce and its economy. Workers who are treated as contractors—but should be classified as employees—may be able to file a lawsuit against the company they work for and recover back pay and other benefits.

ClassAction.com is looking into possible employment lawsuits against companies that misclassify their workers as independent contractors. Contact us to learn your legal options and how a lawsuit can help.

Why Companies Misclassify Workers

There is a simple reason why employers misclassify employees as contractors: It saves them money.

The difference between a contractor and an employee often lies in a legal gray area.

Not all independent contractors are misclassified. Nor does receiving a 1099 taxpayer form from a company automatically mean that you are a freelance worker. The difference between a contractor and an employee often lies in a legal gray area. Even the U.S. Department of Labor (DOL) admits that legitimate contractors play an important role in the economy.

Significant problems arise, however, when employers deliberately misclassify employees in an effort to cut costs. The lower costs associated with hiring independent contractors versus employees include not having to pay:

• Social Security or Medicare (FICA taxes) contributions
• Workers’ compensation premiums
• Unemployment insurance taxes
• The minimum wage
• Overtime for more than 40 hours worked in a workweek

Employers also benefit from 1099 workers because they don’t have to provide them with company sponsored health insurance and pension plans, paid time off, medical leave, meal and rest breaks, expense reimbursement, and other employee perks. Contract workers, furthermore, are less of a legal liability than employees because contractors cannot sue on the basis of employment laws that prohibit discrimination, harassment, whistleblower retaliation, and wrongful termination.

When you consider that independent contractors cost employers up to 30 percent less than employees, it’s easy to see why many companies choose to pay workers on a 1099 basis. But in addition to being illegal, the practice hurts workers, deprives governments of tax revenue, and creates a competitive disadvantage for law-abiding companies.

Industries with High Misclassification Rates

Independent contractor misclassification occurs in a wide range of workplaces, both blue collar and white collar. It tends to be disproportionately high in the following industries:

• “On-demand” startups such as Uber, Lyft, Homejoy, TaskRabbit, Grubhub, and Spoonrocket
• Construction
• Real estate
• Cleaning and janitorial services
• Home care
• Trucking and transportation
• Courier, delivery, and logistics
• Cable and internet services
• Car, limousine, and taxi services
• Hospitality
• Home products installation
• Retail and Internet sales
• Media
• Manufacturing
• Staffing services
• Adult entertainment (including exotic dancers)
• Computer programming
• Security
• Government contracting
• Hotels/lodging

National Enforcement Priority

The Labor Department describes independent contractor misclassification as “one of the most serious problems facing workers, employers and the entire economy.” The problem has been on the rise in U.S. workplaces in recent years. National studies suggesting that 10 to 30 percent of employers may misclassify their employees as independent contractors. Some state studies estimate that the number of misclassified workers is as high as 30 to 40 percent.

The number of misclassified workers may be as high as 30 to 40 percent.

The DOL has partnered with the Internal Revenue Service (IRS) and state workforce agencies to combat the practice of worker misclassification and to recover back wages and unpaid taxes. The agency—which focuses its enforcement efforts on low wage workers in the restaurant, hotel, construction, janitorial, agriculture, retail, and manufacturing industries—has recovered billions of dollars for millions of workers.

Holding Employers Accountable through Lawsuits

Government officials aren’t the only ones making an effort to hold accountable employers that improperly classify employees as independent contractors. Misclassification lawsuits filed by workers are also on the rise.

These lawsuits, like government enforcement actions, seek to put money back into the pockets of workers who were denied fair pay due to misclassification. Importantly, they also allow workers to be proactive about correcting workplace violations, rather than waiting for the government to take action on their behalf.

Two types of worker misclassification lawsuits are possible:

• Individual lawsuits: Individual lawsuits are filed by a single plaintiff, for their own benefit, to address allegations of independent contractor misclassification.
• Class action lawsuits: A class action lawsuit is brought by one, two, or a small group of plaintiffs on behalf of other plaintiffs with a common employer to address claims of worker misclassification.

Proving Your Claim

One of the reasons employers are able to get away with misclassifying employees as freelancers is that the distinction between the two worker types is often hazy.

No single standard is used to determine whether a worker is the employee of a company or is in business for himself/herself. Many governmental agencies have developed multi-factor “tests” to determine the nature of a working relationship. These tests revolve around the degree of control an employer exercises over a worker.

In worker misclassification lawsuits, courts similarly focus on the level of control a business exerts over a worker. The Court may consider which party has control over the following:

• When, where, and how work is done
• Tools and equipment used
• Worker appearance (grooming and uniform)
• Training, reporting, and meeting attendance requirements
• Scheduling hours of work
• Setting the rate of pay
• Assumption of the risk for profit or loss in providing services
• The worker’s freedom to engage in other employment

If the business controls all or most of these factors, then the worker is most likely an employee, not an independent contractor. If the worker primarily controls these aspects of work, however, he or she is probably an independent contractor.

Other factors that may be used to determine worker status include:

• The extent to which the work performed is integral to the employer’s business
• The degree to which a worker exercises managerial skills that affect their opportunity for profit or loss
• How much the worker invests in tools and equipment in relation to the employer
• The permanency of the working relationship
• The degree of skill and independent initiative needed to perform the work

Again, no single factor is determinative. The Court considers (or should consider) all factors in each case to make a determination of economic dependence or independence.

Misclassification Lawsuit Eligibility

To be eligible for an independent contractor misclassification lawsuit, your (alleged) employer must consider you a contract worker even though the nature of your work characterizes you as an employee.

The easiest way to tell if you are currently classified as an independent contractor is to check the tax form your employer gave you. An IRS Form 1099 indicates that you are considered a contract worker. Employees fill out a Form W-2.

Compensation for Misclassified Workers

The most common lawsuit compensation for misclassified workers is back wages in the form of unpaid overtime and minimum wage. Under the Fair Labor Standard Act (FLSA), plaintiffs can seek liquidated damages and recover up to double what is owed to them.

The most common compensation for misclassified workers is back wages—unpaid overtime and minimum wage.

Misclassified workers may also be eligible for expense reimbursement. And once a court has determined that a worker is in fact an employee, he or she may then be eligible for unemployment insurance, workers compensation benefits, and other employee benefits.

We Can Help

If the company you work for tried to cut corners by misclassifying you as an independent contractor, you may be eligible to file a lawsuit seeking back pay and other benefits. These lawsuits usually have a 2-3 year time limit, so it’s important to get in touch with an employment lawyer right away to discuss your rights.

Contact us for a free, no-obligation consultation to learn more.