Alabama jewelry store owner Slater Jones owns a two-carat diamond. That might not seem surprising, but stay with me here. Jones keeps the diamond in his eye. Literally, in his eye.
You see, Jones lost his right eye to illness. Rather than living with a boring old prosthetic eye that looks like, well, an eye, Jones engaged eye prosthetic expert John Lin to create a custom artificial eye from a diamond.
Having a diamond for an eye may seem a bit gaudy, but I guess if you’re in the jewelry business, you may as well just go for it.
Those in the home health care business, on the other hand, should not just go for it — especially if “it” is classifying in-home health aides as independent contractors.
In a settlement finalized earlier this month, California Attorney General Rob Bonta secured a $9.5 million settlement against the individual owners of a home health care company for misclassifying its workers in violation of California law. In this case, the owners appears to have operated the home health agency as a d/b/a without having incorporated. Oopsie. The settlement included another $1.5 million against a different incorporated home health care entity and its family of owners.
The settlement also prohibited all of the defendants from classifying their aides as independent contractors in the future.
We have seen a lot of recent cases brought against home health care companies that classify their workers as independent contractors. This settlement is a stern warning that home health care companies choosing that model need to be extremely cautious.
Because this case was brought by the State, some of the protections we often recommend, like individual arbitration agreements with class action waivers, provide no protection. This case and the settlement also serve as a reminder that individuals can be held liable for intentional misclassification.
The claims brought against the agencies focused largely on California’s Unfair Competition Law (UCL). Misclassification allegations under the UCL typically claim that the wrongdoer gained an improper advantage in the marketplace by unlawfully classifying employees as independent contractors.
Treating in-home aides as contractors may seem like a bright shiny object worth pursuing. But that sparkle you see is no diamond. It’s just the gleam in the eye of the State Attorney General, preparing to count the cash from another misclassification settlement.
A man was detained at Newark International Airport earlier this month for concealing a live turtle in his pants.
The turtle was detected as the man passed through TSA screening. When questioned about the bulge in his groin area, the man said he was just happy to see the TSA agent. No, that’s not what happened at all. Instead, the man reached into his pants and pulled out a 5-inch long red-ear slide turtle.
It is unclear whether the turtle was a pet and whether the man was charged. But he did miss his flight. So let this be a lesson to all of us.
Meanwhile, in California, an in-home healthcare agency learned the hard way that it was concealing a much larger problem. And this problem cost it $2.3 million in fines.
As explained in this news release from the Department of Industrial Relations (DIR), the agency had been classifying its in-home healthcare aides as independent contractors, not employees.
After receiving a complaint, the DIR investigated and found that under California law, the aides should have been treated as employees. The Labor Commissioner issued citations under a relatively new section of the California Labor Code, making this the first enforcement action in which the civil penalties for misclassification were collected as damages for the affected workers, rather than as a penalty paid to the state. (How generous, California!)
This enforcement action is an important reminder of three things.
First, when the work performed is within the company’s normal course of business, the workers are probably going to be deemed employees under California’s ABC Test (unless one of several exceptions applies). California law makes it very difficult to retain solo workers as independent contractors if you retain them to perform a core business function.
Second, in-home health care is an industry in which misclassification maybe widespread, especially when applying California law. The business of in-home healthcare is to provide in-home healthcare. It’s difficult to say that those who do the work are not employees.
Finally, this action illustrates the breadth and depth of penalties a company can face for misclassifying its workers. The $2.3 million in penalties here included:
$422,033 in unpaid minimum wages*
$424,809 in unpaid overtime wages*
$165,162 in meal and rest period premiums*
$27,400 in wage statement penalties
$108,094 in waiting time penalties for delayed final wages
$550,000 in penalties for willful worker misclassification
$81,673 in penalties for no workers’ compensation insurance for the misclassified employees
$422,033 in liquidated damages
$18,950 for other civil penalties
When a company treats its workers as contractors, it’s not following the laws that would apply to employees. If, by law, the workers were misclassified, then there are a whole lot of employment laws that the company was almost certainly not following. That makes for a lot of damages.
The advice here is the same as always. Companies using indepednent contractors should be proactive in evaluating these relationships and whether they can survive a legal challenge. There are almost always things that a company can do to better solidify its workers’ status as independent contractors. The best time to act is before an investigation or lawsuit begins.
Complacency is no defense. The fact that you’ve been doing it this way for years and haven’t been sued only means that you haven’t been sued yet.
In other words, if there’s a turtle in your pants, there’s a good chance you get caught at some point, so you better have a good explanation prepared in advance.
When Joni Mitchell wrote “Big Yellow Taxi,” she had just arrived in Honolulu. She was inspired by the view outside her hotel window, with beautiful green mountains in the distance and, closer to the hotel, a “parking lot as far as the eye could see.” Ugly.
For business owners, the beautiful green mountains are successful business operations, with the business having been built the way you wanted and cultivated over a number of years. Paving over that paradise with a parking lot is the government coming in and forcing you to change how you do business. Ugly.
That’s what is happening to companies that rely on independent contractors but aren’t deliberate enough in how they set up their IC relationships. Looking back at 2024, here’s what I mean, with two specific examples.
Two companies with nationwide operations were forced to convert all independent contractors to employees, at least those working in California.
WorkWhile and Qwick provide gig workers to fill empty shifts. Qwick operates in the hospitality industry, and WorkWhile operates across multiple fields, including manufacturing, hospitality, and general labor.
The companies treat the gig workers as independent contractors. The City of San Francisco sued each company on behalf of the State. The lawsuits alleged that the gig workers were misclassified and should have been treated as employees under California law.
In 2024, both companies settled. Each agreed to pay a seven-figure settlement and to reclassify all gig workers as employees. (Press releases are here and here.)
Before the lawsuits, both companies had operated their businesses this way for years. They didn’t get sued and didn’t have to reclassify the contractors — until they did.
This case is a good reminder of two important rules.
1. Just because you have been doing it this way for years doesn’t mean it’s lawful.
2.The fact that you haven’t been sued means only that you haven’t been sued yet.
Before the lawsuits were filed, the companies had options.
They could have been proactive about changing the facts of the relationships and the contracts. They could have molded the facts the way they wanted without government oversight, in a way that would better insulate them from misclassification claims. This would have been difficult in California, with its strict ABC Test, but not impossible. But it would have taken hard work and a willingness to make changes proactively.
Or they could have converted their contractors to employees, but done it on their own terms, without the government telling them how they have to operate their business.
Now, as part of their settlements, these companies are forced to allow the government to monitor and dictate how they interact with these workers.
Don’t it always seem to go / that you don’t know what you’ve got ‘til it’s gone?
Once the government is monitoring how you do business, you’ve lost the flexibility to adapt and build on your terms. It’s too late. The time to act is before you get audited, investigated, or sued. See Rule #2.
I see the bad moon a-rising I see trouble on the way I see earthquakes and lightning I see bad times today
When John Fogerty wrote “Bad Moon Rising,” he was reportedly inspired by the 1941 film The Devil and Daniel Webster. There’s a scene in the film where a hurricane destroys the crops of several farms, but spares those of a man who had made a deal with the devil in exchange for wealth.
When classifying independent contractors, a deal with the devil generally doesn’t work. If you misclassify your workers as contractors, when the law says they should be employees, trouble will eventually be on the way.
A printed media delivery company found that out the hard way, after being investigated by the New Jersey Department of Labor and Workforce Development (DLWD).
There was no civil lawsuit here. A state agency went after the company. Be wary of state agency audits. This one cost the company $2.7 million in a recent settlement.
Overview: The New Jersey Attorney General and the DLWD reached a $2.7 million settlement with Publishers Circulation Fulfillment, Inc. (PCF) for misclassifying delivery workers as independent contractors.
Findings: The investigation revealed that PCF exerted significant control over its delivery workers, who were largely immigrants working overnight for low wages. PCF failed to classify these workers as employees, violating New Jersey labor laws.
Settlement Details: The settlement totals $2.7 million, covering approximately 2,400 workers.
History of the Investigation: The investigation began in 2021, focusing on PCF’s compliance with state employment laws from 2019 to 2022. It was found that PCF made unlawful deductions from workers’ pay and failed to provide essential protections. In a separate 2022 settlement, PCF was required to pay nearly $2.7 million for failing to contribute to the state’s Unemployment Compensation and Disability Benefits Funds between 2015 and 2018.
When considering independent contractor relationships, companies often make the mistake of assuming that if both parties are satisfied with the arrangement, it will be ok. Not so.
State agencies are becoming more and more aggressive in enforcing misclassification on their own. States lose money from misclassification because employers contribute funds to state unemployment and workers’ compensation funds for employees, but not for contractors.
So make sure your workers are properly classified, and heed this warning from John Fogerty and the band:
Hope you got your things together Hope you are quite prepared to die Looks like we’re in for nasty weather One eye is taken for an eye.
Driving back from Ann Arbor after dropping off my youngest daughter at college, I decided it would be a good time to catch up on some albums I hadn’t heard in a while. Soon I settled on Amy Winehouse’s Back to Black, which was her second and final album, released in 2006. The article liked here describes the conversation with her father that led to the song.
If Amy had gone to rehab, it’s fair to assume she would not have expected to be considered an employee of the rehab center where she was being treated. That was probably the expectation of a number of rehab patients at a Texas facility too, but a court ruling last month found otherwise.
It’s true, the situation in this case was a bit unusual, but it still involves rehab patients being deemed employees of their rehab enter. Here’s how it went down.
The patients, as part of their treatment, were required to undergo vocational, on-the-job training at third parties, where they worked regular shifts. The third parties would pay the rehab center, and the fees were used to offset operating costs. The patients signed agreements that they did not expect compensation for their work.
The rehab center, though, essentially functioned as a staffing agency. It charged the third parties for the patients’ time, even charging time-and-a-half when they worked overtime hours. The patients saw none of that cash, and some of them sued.
A district court in Texas applied the economic realities test and found the patients to be acting as employees of the rehab center / staffing agency when it performed the offsite work. After discovery, the court certified a collective action under the FLSA, and the case is ongoing.
An interlocutory appeal to the Fifth Circuit Court of Appeals failed, with the appeals court holding that the district court applied the right test for determining whether the patients could have been employees.
This case, while still underway, is a good reminder that employment relationships can be created in unexpected ways. This time it was the rehab center that tried to say, no no no.
In Inner Mongolia, these sheep have been walking in a circle for about two weeks, with a few sheep occasionally standing in the middle. Here’s video.
Various theories have been circulating to try to explain the odd behavior, including that it may be some sort of bacteria-induced delirium.
But I think I know the real reason. (And a hearty Mazel Tov! to the wooly couple!)
When drafting independent contractor agreements, it’s never a good idea to be unsure of why you’re doing something. Too often, businesses use generic agreements and don’t understand the impact or purpose of what they’ve written.
One common place I see mistakes is in the very beginning of contracts – the contractual recitals.
Recitals are often used to provide context for the reader. Recitals are also used for six-year old piano players to play chopsticks for grandma, but that’s for another day. For example, an off-the-shelf independent contractor agreement might start with something like this: We’re in the business of doing X, and we are retaining Contractor to do this part of X. Therefore, the parties agree to the following terms.
The problem with that innocent sounding recital is that it may be evidence the contractor is misclassified.
Under a Strict ABC Test, if the work being performed by the contractor is within the hiring party’s usual course of business, the contractor is automatically considered an employee. That fact fails prong B of a strict ABC Test.
Under an Economic Realities Test or a Right to Control Test, one of the factors often considered is often whether the work being performed is “an integral part” of the business, or some variation on that theme. Unlike ABC Tests, these tests are balancing tests and so one factor will not necessarily determine a worker’s classification, but there’s no reason to give the factor away, especially in a contract recital.
In a misclassification challenge, every fact and contract term will be subject to scrutiny.
If you’re unsure whether the term is needed, then question whether to include it. Recitals generally aren’t needed at all, and I often omit them from my independent contractor agreements. Don’t include off-the-shelf terms if you don’t understand their effect.
Unexplainable behavior makes for good blog posts and tweets, but not good contracts.
Which is why I never ask unfamiliar sheep to help me draft contracts.
Zippy practices for the 13th Annual Lying Down Championships
Lying down in the face of a challenge is rarely a good strategy. I did, however, find one exception.
A man from Montenegro recently won the 12th Annual Lying Down Championships, beating out nine other competitors by remaining horizontal under a tree for 60 hours. As a reward for his (lack of) effort, he received 350 euros, lunch for two at a restaurant, a weekend stay at a local village, and a rafting trip.
Then things got weird. Local media reported that shortly after the competition, the winner was taken into police custody for (allegedly) physically attacking journalists and damaging the headquarters of a newspaper that called him “the biggest swindler in all of Montenegro.”
I suppose there’s a lesson in here somewhere: Offer a man an award and he’ll lie still for 60 hours, but call him a swindler and he won’t take that lying down.
But I digress. In this post, I want to share some tips gleaned from a recent New Jersey Supreme Court case involving prong C of the ABC Test. The case also serves as a reminder never to take a misclassification audit lying down.
The dispute involved East Bay, a drywall installation company that used independent contractor drywall installers for residential jobs. Until 2013, the company treated its installers as employees. It then switched to an independent contractor model. Risky move. This sparked an audit.
The New Jersey Department of Labor and Workforce Development wanted to know why this company, which was still active, suddenly lacked employees. The audit looked at the individuals who continued to install drywall and examined whether, under New Jersey’s ABC Test, they were independent contractors or employees.
You can guess what happened next. The Department found that 16 installers were misclassified, and it issued a hefty back assessment against the company for failing to pay into the state unemployment fund. The company appealed and lost.
The New Jersey Supreme Court’s opinion focused largely on what it takes to prove prong C of the ABC Test — that the individual “is customarily engaged in an independently established trade, occupation, profession, or business.” (You can read more about New Jersey’s ABC Test here, but otherwise I am going to assume that readers are familiar with the basic concept of the ABC Test.)
The drywall company put forth evidence that the independent contractors had registered business entities and certificates of insurance. The New Jersey Supreme Court held that wasn’t enough to satisfy prong C. This evidence wasn’t enough to prove that the individuals truly operated independently. Evidence in support of prong C should demonstrate that the independent contractor would not become unemployed if the work from this company went away.
The Court gave some examples of evidence that would have been more persuasive in satisfying prong C, including:
That the IC’s business will continue when this engagement ends;
That the IC’s business is stable and lasting, or other evidence of longevity;
That the IC has other customers;
That the IC has other sources of revenue, and the company being audited is not the primary source of income for the IC;
That the IC provides the tools, equipment, vehicles, and other resources needed to perform the work;
That the IC has telephone listings or business stationery;
That the IC advertises;
That the IC has its own employees;
That the IC maintains inventory;
That the IC bears the risk of loss;
That the IC benefits from the goodwill generated from a job well done;
That the IC is required to maintain educational and licensure requirements;
That the IC is permitted to obtain work from other businesses; and
That the IC in fact performs work for other businesses.
The court cited these as examples of the types of evidence that would have been helpful to prove prong C. This is not a mandatory list. The point here was just that business registrations and certificates of insurance were not enough. Strategically, there is other evidence that would be helpful too, and there are steps that can be taken when retaining ICs to help build a defense. I maintain a longer list but, hey, I can’t give away all the secrets here.
Other observations from the New Jersey Supreme Court decision:
1. How to invite an audit. Switching from an employee model to an independent contractor model is, by itself, enough to prompt an audit.
2. An ominous footnote about prong B. There was also a dispute in this case over the meaning of prong B. Remember, New Jersey has a standard ABC Test, which allows prong B to be satisfied by showing either the work is outside the hiring party’s usual course of business or the work is performed outside of the places of business of the hiring party. (This is different than the California version of the ABC Test.) All drywall installation work was performed at customers’ residences. After the audit, the Commissioner of Labor found (inexplicably) that prong B was not satisfied. It is unclear from the opinion whether that was based on a conclusion that the customers’ residences were East Bay’s places of business or was based on some other fact, such as some kind of work being done at East Bay’s place of business. If the Commissioner believed customer’s residences to be East Bay’s places of business, then it is hard to see how the latter part of prong B could ever be satisfied. But the NJ Supreme Court did not consider prong B in its decision. The Court ruled that prong C was not satisfied, and so it chose not to wade into the morass of prong B.
But there is an ominous footnote. When the Court declined to consider prong B, it noted that in its prior decisions, the place of business meant locations where the hiring party had a “physical plant or conducts an integral part of its business.” That’s consistent with common sense and would exclude a customer’s residence. The Court then, however, invited the Department of Labor to issue regulations explaining how the Department thinks prong B should be interpreted. Yikes!
3. You need to fight unemployment claims by ICs at the initial audit level; you can’t expect a court to save you on appeal. Courts will defer to the findings of an agency if its factual findings have any support in the record, no matter how flimsy. In other words, the agency can be wrong in its overall weighing of the factors, but a court is supposed to affirm the agency’s decision if there’s evidence to support it. Not “a preponderance of evidence” or “ample evidence” or even “sufficient evidence.” Just “evidence.” Folks, the reason we have trials is because there’s almost always at least some evidence on both sides, even if the preponderance of the evidence leans the other way. You shouldn’t have to pitch a shutout to win the game.
I have seen the same deference standard applied to unemployment decisions in New York and Ohio. The courts defer to the agencies. It is unfair. The result can be that the agency’s decision gets affirmed, even if it made the objectively wrong decision.
This unfair standard highlights how important it is to win at the earliest stages in an unemployment claim, if independent contractor status is being challenged. The initial investigation is your best chance to defend independent contractor status. If you wait, it’s too late. Provide the auditor your best evidence on every factor, and don’t hold back.
Remember the consequences too. If one contractor is misclassified, the agency will likely deem all other similarly situated contractors to be misclassified, and you’ll be on the hook for unpaid assessments for all of them. The stakes are high. Companies using independent contractors should spend the time and money to mount a full defense of their contractor’s status at the audit stage. It’s worth the investment, especially because the state courts will generally defer to the agency’s findings, even if the agency is wrong.
Here’s the ultimate takeaway: If you’ve entered a Lying Down Competition, it’s ok to lie down for as long as you want. But if you’re faced with a worker classification audit, or a 1099 audit, or an unemployment claim by a former independent contractor, do not take that lying down.
You need to fight hard in the audit, producing evidence to support independent contractor status. You’ll have the right to appeal if you lose, but don’t expect a fair chance to prove your case. You’ve got to do your best to win any classification dispute at the initial audit. That’s the time to retain counsel and invest time and resources. If you lose the audit and bring an appeal, you’re fighting a steep uphill climb.
According to pizza.com, “There are approximately 61,269 pizzerias in the United States.” That number seems pretty precise to me, not an approximation, but who am I to question something I read on the internet?
Approximately 4 of the 61,269 pizzerias are owned by a New Yorker named Paola P., who runs each of the 4 under a different LLC. Paola’s employees can be assigned to any of the 4 pizzerias on their workdays. Seems boring so far, but stay with me. Now say this three times fast:
Paola’s practice prompted problems since Paola P’s pizzerias were impermissibly positioning personnel to prevent paying overtime.
[NOTE 9/2019: Not anymore. The information in this post has been superseded by a later NLRB decision. In Sept. 2019, the NLRB ruled that independent contractor misclassification is not an automatic violation of the NLRA. It still can be, but it is no longer automatically a violation. Read more here.]
Here’s the original post:
The past two weekends, we have seen NFL players link arms in solidarity. They protest mistreatment and injustice in society, not mistreatment and injustice by their employers. In fact, there have been several instances where owners and coaches have joined in.
Had the players been protesting actions by their employers — their teams — their actions likely would be considered “protected concerted activity” under the National Labor Relations Act (NLRA). The NLRA grants employees the right to act collectively to protest terms or conditions of their employment. Employees have these rights even if there is no union.
I received an email this week from a worker claiming he was “Miss Classified.” I did not know there was a pageant for that, but I suppose congratulations were probably due. I politely responded that I only represent companies, not individuals, in disputes relating to independent contractor misclassification, and I wished him luck.
But then I started thinking, What if there was a pageant? What would it take to be crowned Miss Classified?
I came up with a few criteria.
To be named Miss Classified, a contestant would probably have a job that requires her to work a set daily schedule, with little flexibility. She’d have to ask a supervisor for time off (including to enter this pageant).
A fixed schedule suggests employment when assessing Independent Contractor vs. Employee, so I’d award that contestant a point toward becoming Miss Classified. If the supervisor denies the request for time off, I’d award an extra point toward Miss Classified status — but sadly, if denied the day off, this worthy contestant might not show up for the pageant. [🤔]
I’d award another point toward being named Miss Classified if she uses company tools and equipment. If she does office work, she’d get points if she uses someone else’s desk and computer, performs her work at the company’s primary place of business, and has a company badge. I’d award bonus points if she has a company email address.
Instead of a swimsuit competition, I’d have contestants reveal what they wear to work. Anyone wearing a swimsuit is at the wrong pageant and would be asked to leave. But anyone wearing company uniform or logo would get a point. I’d have an exception, though. If the company shirt says “Company – Authorized Contractor,” no points.
For the talent portion of the Miss Classified pageant, I’d ask candidates how they learned their special skill. I’d award no points to anyone who became licensed and trained on their own time and on their own dime. But if they learned their craft from the company they are working for, I’d award a point toward being named Miss Classified. If the company paid for the license or training, I’d award another point.
My pageant would have a monetary award for the winner (let’s just call it damages), but before awarding any economic prizes, I’d ask the contestants about their current financial situation. Are you economically reliant on one company for all your compensation? If yes, two points. That’s a candidate who might be worthy of the title Miss Classified.
On the other hand, a candidate gets no points if she performs work for several companies and advertises her services in the marketplace. Anyone using a personal business card and website to advertise her services to the public gets no points. Anyone who is simultaneously working for one company and that company’s direct competitors will be disqualified from the competition. That person is probably not Miss Classified.
I’d hold my competition in California. That would be the most likely place for someone to be named Miss Classified. California has all sorts of state laws that would influence the outcome of my competition.
I’d have Simon Cowell judge. Not for any good reason though. I just think that would be good for ratings.
And the winner is … hopefully not anyone performing services for your company!
(In case you were wondering, this would NOT be the among the world’s strangest pageants. But these are.)
According to 
I received an email this week from a worker claiming he was “Miss Classified.” I did not know there was a pageant for that, but I suppose congratulations were probably due. I politely responded that I only represent companies, not individuals, in disputes relating to independent contractor misclassification, and I wished him luck.
Who Is My Employee? 