The High Cost of Misclassifying Independent Contractors
Last week it was reported that a Therapy Firm in California must pay more than $9 million in an Independent Contractor misclassification case. The firm had misclassified 1,280 speech, physical and occupation therapists. The misclassification was discovered during an investigation by the California Labor Commissioner’s Office, which uncovered that the firm had spent an estimated $200 million in advertising and recruiting campaigns since 2019 to find and hire these independent contractors. This case serves as an important reminder that employers must properly classify their workers as employees or independent contractors to ensure compliance with labor laws.
This case and its timing are significant, as there has been a lot of attention around proper IC classification over the past couple years. This case is a prominent example of the crippling fees associated with misclassifying Independent Contractors.
The California Labor Commissioner stated “these misclassified therapists provided healthcare services while they were simultaneously being denied paid sick leave and Covid-19 SPSL.” Furthermore,“Feld Care Therapy and CEO Randi Peled are jointly liable for $1,134,500 in damages owed to the 1,280 workers and a civil penalty of $1,677,500 for the violation of the itemized statement provision, according to the office.
In addition, Feld Care Therapy is liable for damages of $1,707,350 for failure to provide written notice of sick leave balance/usage, $1,554,850 for the violation of the supplemental sick leave provisions and $256,900 for paid sick leave record keeping requirements, according to the office. Feld Care Therapy is also liable for civil penalties of $2,710,000 for willful misclassification of employees as independent contractors.”
Last week it was also reported that Uber, Lyft and other gig drivers won their legal battle challenging California’s Proposition 22.
The ballot initiative, which became law in 2020, granted app-based transportation and delivery companies an exception to AB 5 to classify their drivers as independent contractors rather than employees. A group of drivers and unions filed a lawsuit challenging the law in 2021. After an expansive and drawn-out legal battle, the Court of Appeals upheld Prop 22 on Monday of last week, a huge win for both companies and drivers alike. The ruling is a major victory for app-based companies, who were threatened with hefty fines if they failed to comply with the state law. It also gives gig drivers more freedom and flexibility while allowing them to remain independent contractors, a status that allows them to decide when and where they work. The decision could also have a ripple effect in other states, where similar legislation is being debated. With the issue of worker classification now resolved in California, the focus shifts to other aspects of the gig economy, such as wages and benefits for drivers. The ruling could set a precedent for how companies and contractors interact in the gig economy and could influence how labor laws are crafted in other states. It may also put pressure on companies to provide better wages and benefits to their drivers, as well as greater safety protections. Ultimately, the decision is a victory for both sides of the debate and may set the stage for a more equitable and sustainable gig economy in the future.
The legal determination between W2 employees and independent contractors can be confusing and have crippling financial implications if improperly done. Using a third party to properly classify your independent contractors will not only save you money in the long term, but also de-risk the potential of misclassifying Independent Contractors. Suna Solutions offers independent contractor evaluation in which the liability of wrongful determination is removed from our clients’ burden. If you would like to inquire on our independent contractor evaluation services, click here for more information.
Tyler Cook, Total Talent Solutions at Suna Solutions