Federal court rulings send clear message to employers who misclassify workers as ‘independent contractors’

Two recent and very significant legal victories for California workers send a strong message to employers nationwide: if you misclassify your employees, you will face the consequences.

Misclassification is a practice used by some employers to cut costs by declaring their workers to be independent contractors — ducking their obligations to pay at least the minimum wage and overtime pay, and legally required contributions to unemployment insurance and workers’ compensation funds. These employers also fail to remit payroll taxes, resulting in huge losses to state treasuries, and the federal Social Security and Medicare programs.

The U.S. Department of Labor, which has made combatting worker misclassification a major focus of its enforcement efforts, has announced that federal courts have ruled against two Bay Area companies and sided with their employees after investigations revealed that the companies deliberately misclassified the workers as independent contractors to cheat them out of their wages and other critical workplace benefits.

National Consolidated Couriers Inc., based in San Leandro but with clients across the country, has agreed to a court judgment requiring it to pay $5 million in back wages and damages to more than 600 drivers it misclassified as independent contractors, having cheated them out of minimum wage and overtime pay. The judgment reveals that, during the course of the Labor Department’s investigation, the employer tried to destroy records showing an employment relationship with its drivers, and had been misclassifying the workers over at least five-year period.

In another major win for workers, a federal judge ruled that drivers for Mountain View-based Stanford Yellow Taxi Cab, Inc. were also misclassified. In this case, the department had to file suit to stop Stanford Cab from threatening and intimidating its drivers who were cooperating with investigators, including an instance where Stanford fired a worker just days before trial to discourage his witness testimony. The court’s decision allows the department to continue with litigation forcing the company to pay nearly $3 million in back wages and damages to dozens of drivers.

“Misclassification is workplace fraud, plain and simple,” said U.S. Secretary of Labor Thomas E. Perez. “It hurts workers by denying them a fair day’s pay for a fair day’s work, and it also undermines the competitiveness of businesses that are playing by the rules. At the Labor Department, through vigilant and vigorous enforcement, we are cracking down on irresponsible employers who game the system and cheat their employees — and that’s what they are: not contractors, but employees.”

In both the NCCI and Stanford Cab cases, the courts rejected arguments that the drivers were independent contractors in business for themselves as their employers alleged.

In the case of Stanford Cab, the company required drivers to be on the job six days per week for 12-hour shifts but did not compensate them for all of those hours. Stanford also did not allow drivers to change their schedules or operate independently by reaching out directly to passengers. Drivers also had to abide by a dress code. They were and are employees under every reasonable interpretation of the law.

Wage and Hour Division Administrator Dr. David Weil, who in July issued official guidance to employers about avoiding misclassifying workers, said that his agency takes this matter seriously.

“We are attacking this problem head on through education and outreach as evidenced by our recent guidance to the employer community,” Weil said. “But make no mistake. We are also engaged in a nationwide, data-driven strategic enforcement initiative across all industries to ensure that workers are correctly classified and properly paid, and that those employers who are playing by the rules aren’t operating at a competitive disadvantage to those who aren’t.”

Typically, the Wage and Hour Division finds misclassification in low-wage industries. And while the misclassification of an employee as an independent contractor is not in and of itself illegal under the laws the department enforces, it typically leads to violations of the minimum wage and overtime provisions under the Fair Labor Standards Act which it does enforce.

In Fiscal Year 2014, Wage and Hour Division investigations resulted in more than $79 million in back wages for more than 109,000 workers in low-wage industries such as janitorial, food service, construction, day care, hospitality and garment.

The Wage and Hour Division currently has agreements with 25 states to jointly combat misclassification. The partnerships have led to better information sharing and coordinated enforcement to ensure resources are used strategically, effectively and efficiently to protect workers.

On July 28, 2015 the California Attorney General Kamala D. Harris and the U.S. Department of Labor’s Wage and Hour Division (WHD) signed a cooperative agreement to crack down on employer wage theft and other illegal labor practices. The Memorandum of Understanding signed by both agencies will facilitate the sharing of information and enhance enforcement of labor violations.

“As these court rulings indicate, the tide is turning against those employers who misuse independent contractor status to take advantage of workers,” said Regional Solicitor Janet Herold of the department’s Western Region, who litigated both cases. “The courts recognize the nature of this problem and stand ready to ensure that justice is served. America’s workforce deserves no less.”

Although there are some exceptions, almost all employees in California must be paid the minimum wage as required by state law. Effective July 1, 2014, the minimum wage in California is $9.00 per hour. Effective January 1, 2016, the minimum wage in California is $10.00 per hour. Click here for California Overtime Rules. Employers also must maintain accurate time and payroll records.

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Source: DOL

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This document has been provided for informational purposes only and is not intended and should not be construed to constitute legal advice. Please contact your employment attorney in connection with any fact-specific situation in which you intend to take significant employment action. Readers agree that they will not hold Payroll Masters in indemnity and Payroll Masters assumes no liability. Payroll Masters is not engaged in rendering legal or accounting services. Therefore, Payroll Masters assumes no responsibility for claims arising from the use or implementation of the above information. 

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