Employment classification has become one of the most heavily scrutinized issues in California’s workforce. Many businesses attempt to cut costs by classifying workers as independent contractors (1099) instead of employees (W-2).
While there are legitimate independent contractor arrangements, California law sets strict standards on who can legally be paid as a 1099 contractor. If employees are wondering whether their employer is paying them correctly, it’s important to understand the differences between a 1099 contractor and an employee under California law.
1099 Independent Contractor vs. W-2 Employee
A 1099 Independent Contractor is a person who runs their own business, sets their own hours, controls how they perform work, and usually has multiple clients. They are not entitled to employee benefits such as minimum wage, overtime, paid sick leave, unemployment insurance, or workers’ compensation. In addition, independent contractors pay self-employment taxes and file a 1099 form during tax season.
In comparison, a W-2 Employee is an employee who is under the control of the employer regarding what work is done, how it is done, and when it is performed. Employees are protected by California’s Labor Code, Wage Orders, and other workplace laws and employers are required to provide benefits such as overtime pay, meal and rest breaks, unemployment insurance, and workers’ compensation. For federal tax purposes, employees are issued a Form W-2, which must be filed with their annual tax return during tax season.
California’s “ABC Test” Under AB 5
California law presumes a person is an employee unless the employer can prove all three parts of the ABC Test under California Labor Code 2775 (established by AB 5 and clarified by later amendments such as AB 2257):
A – Autonomy:
The contractor is free from the control and direction of the hiring entity in performing the work, both under the contract and in fact.
B – Business of the Employer:
The contractor performs work that is outside the usual course of the hiring entity’s business.
C – Customarily Independent:
The contractor is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
If an employer fails to meet even one of the following requirements, the contractor must be classified as an employee, not a 1099 contractor.
Why Employers Misclassify 1099 Employees
While the reason for misclassifying workers will vary on a case by case basis, the majority of employment claims tend to be due to financial reasons.
Employers may attempt to reduce their costs by misclassifying them as 1099 contractors to avoid paying payroll taxes, benefits, and possibly even to reduce liability for wrongful termination claims.
Nurses, janitors, and security guards often get hired by staffing companies, but tend to work under direct employer control, which may lead to confusion about the limits of employee rights.
What Rights Do Misclassified Workers Lose?
If workers are improperly classified as a 1099 contractor in California, they may be denied a variety of protected benefits under state code such as any of the following:
- Minimum wage and overtime pay (California Labor Code 1194).
- Meal and rest breaks (Labor Code 512).
- Paid sick leave (Healthy Families Act of 2014).
- Unemployment benefits (Unemployment Insurance Code).
- Workers’ compensation coverage (Labor Code 3700).
- Employer contributions to Social Security and Medicare.
Penalties for Misclassification
California imposes steep penalties on employers who misclassify workers. Civil penalties can start at $5,000 per violation under California Labor Code 226.8.
In addition, employers may be forced to pay unpaid overtime, minimum wages, meal and rest break premiums, interest and may even owe back taxes, contributions to state disability and unemployment funds, and IRS penalties.
Depending on the nature and severity of the claim, employees who were misclassified can recover legal fees under California Labor Code 1194 if they prevail in wage theft claims.
Lawyers for Justice, P.C. Is Here to Help
Misclassification is a widespread issue in California, and workers often lose thousands of dollars in wages and benefits as a result. If an employer is choosing to pay their workers as 1099 contractors instead of full-time employees and is not properly complying with California’s labor standards, then misclassified workers can file a claim to recover compensation.
If anyone believes their rights are being mishandled by their employers, it is recommended that they consult with a skilled wage and hour attorney.
Lawyers for Justice, P.C. (LFJ) is an employment law firm that fights for employee’s rights and holds their negligent employers accountable. With decades of experience representing clients from all walks of life, the legal team is committed to their mission to get employees what they are owed.
Take the first step to reclaim your rights today by calling us 818-JUSTICE or by filling out the online contact form for a free consultation.
Frequently Asked Questions About 1099 Misclassification in California
Can My Employer Pay Me as a 1099 Instead of a W-2 Employee in California?
In California, an employer can only pay a worker as a 1099 contractor if the worker meets the strict requirements of the state’s “ABC Test” under AB 5. If even one part of the test is not satisfied, the worker must be classified as an employee and receive all associated protections and benefits.
How Do I Know If I Am a 1099 or a W-2 Worker in California?
A 1099 contractor operates an independent business, controls how and when the work is done, and generally has multiple clients. Independent contractors are issued a Form 1099 — most often a 1099-NEC — to report their income.
In contrast, a W-2 employee works under the employer’s control, receives a W-2 form, and is entitled to protections such as minimum wage, overtime pay, meal and rest breaks, unemployment insurance, and workers’ compensation.
What Happens If an Employer Misclassifies Workers in California?
California imposes steep penalties for misclassification. Employers can face civil fines for violations under Labor Code 226.8, as well as liability for back wages, unpaid overtime, missed breaks, back taxes, and contributions to unemployment and disability funds.
Misclassification may also create tax issues, since workers may have to file incorrect forms such as a 1099-MISC or 1099-K instead of being properly issued a W-2.
What Benefits Do Employees Lose If Classified as 1099 in California?
Workers misclassified as 1099 contractors may lose access to minimum wage, overtime pay, meal and rest breaks, paid sick leave, unemployment benefits, workers’ compensation coverage, and employer contributions to Social Security and Medicare.
They are also responsible for paying self-employment taxes and may rely on tools like a 1099 tax calculator to estimate what they owe.