California Independent Contractor Payment Laws

By Brad Nakase, Attorney

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Table of Contents

1. Introduction

2. What Rights do Independent Contractors Have in California?

3. What is the difference between employees and contractors?

4. What are the penalties for misclassification?

Introduction

In California, independent contractors have the right to choose their clients and the projects they work on. They have the freedom to negotiate terms, set their own rates, and determine their work schedule. This independence is a fundamental aspect of their status, distinguishing them from employees.

Contractors also have the right to receive payment for the services they provide, as stipulated in their contract or agreement with the client. While there is generally no law mandating how much an independent contractor should be paid, the terms of payment should be agreed upon in advance and detailed in the contract to avoid disputes.

One significant issue in the realm of independent contracting is the classification of workers as either employees or independent contractors. Proper classification is crucial because it determines the rights and benefits a worker is entitled to. In California, the ABC test is used to determine whether a worker should be classified as an employee or an independent contractor. The ABC test requires that:

A) The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract and in fact.

B) The worker performs work that is outside the usual course of the hiring entity’s business.

C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

If these conditions are not met, the worker should be classified as an employee, which entails certain rights and benefits like minimum wage, overtime pay, workers’ compensation, etc. To determine if a worker is properly classified as an independent contractor, please contact our Los Angeles business lawyer.

Independent contractors in California have the right to legal recourse if they believe their rights have been violated. They can bring legal action against clients who fail to fulfill their contractual obligations, such as non-payment for services rendered. They can also challenge their classification if they believe they have been misclassified as independent contractors when they should be considered employees. California’s labor laws provide mechanisms for addressing these issues through legal channels.

What Rights do Independent Contractors Have in California?

California’s policies surrounding independent contractors do not ensure the same state and federal rights that employees receive. However, independent contractors who work in California do enjoy certain rights. Here are the most important rights independent contracts have and an explanation of what these rights enable the workers to do.

Do Independent Contractors have the Right to Work?

Many people who became independent contractors did so because they enjoy the autonomy the position brings. Independent contractors have no supervisors but themselves, and they can have the final say on their projects.

This is not to say that the hiring party has no influence; they do. In some cases, the company that hired the contractor may provide instructions, such as how they want the project to look or when it should be done. However, the contractor determines how they complete the project.

Do Independent Contractors Have the Ability to Contract?

When a contractor in California finds a company wanting to hire them, they should sign an independent hiring agreement. When the contract worker signs an agreement with the company, they do so to secure their interests and make sure that the hiring party does not take advantage of them.

Every project has different parameters for independent contractors, and each project comes with different expectations. Therefore, signing a contract that each party agrees to protects the independent employee’s interests.

For example, let’s say a company refuses to pay an independent contractor what he or she is rightfully owed. If workers signed an independent contractor agreement, they would have a path to recourse under state law. However, if the company continued refusing to pay, the contract worker could file a lawsuit against the company to collect damages.

Therefore, contract workers in California should sign the appropriate contract agreement before they begin working since it could save them time and money in the long run.

What Right to Payment do Contract Workers in California Have?

No one wants to work for free, and employers must pay employees for their work. Companies that hire contract workers are not liable for federal and state taxes when they issue payments. However, according to their specific employment contract, all California contractors are eligible to be paid for their work.

What Right to Correct Classification do Contract Employees in California Have?

Independent contract workers in California possess certain rights, including the correct classification. AB5 changed what it means to be an independent contractor.

It is integral for workers to understand if they will be classified as contract workers or employees since employees and independent workers are treated differently and play different roles within a company.

What is the difference between employees and contractors?

Overtime and Minimum Wage

Employees are entitled to certain protections under labor laws, including minimum wage and overtime pay. In California, employees are subject to both federal and state minimum wage laws. As of January 1, 2021, the state minimum wage for employers with 25 or fewer employees is $13 per hour, and for employers with 26 or more employees, it is $14 per hour. Overtime pay is generally required for employees who work more than 8 hours in a day or 40 hours in a week. Overtime pay is usually 1.5 times the regular hourly rate.

Independent contractors are generally not entitled to minimum wage or overtime pay. They negotiate their payment terms and rates directly with their clients, and these terms are usually outlined in a contract or agreement. Contractors are not subject to the same wage and hour laws as employees.

Federal and State Benefits

Employees are eligible for various federal and state benefits, including Social Security, Medicare, unemployment insurance, workers’ compensation, and family and medical leave. Employers are required to contribute to some of these benefits, and employees have access to them based on their employment status.

Independent contractors are not eligible for the same range of benefits as employees. They are considered self-employed and are responsible for paying their own Social Security and Medicare taxes (known as self-employment taxes). Contractors are not covered by workers’ compensation provided by clients and are generally not entitled to unemployment benefits, family and medical leave, or other employment-related benefits.

Misclassification and Legal Recourse

Misclassification occurs when a worker is wrongly classified as an independent contractor instead of an employee, or vice versa. In California, misclassification can lead to legal consequences for employers, such as penalties for not providing proper benefits or paying taxes. The ABC test (as mentioned in the previous response) is used to determine worker classification.

Do Independent Contractors Get Federal and State Benefits in California?

Unlike full-time workers, employers are not required to pay independent employees any unemployment insurance. There are additional benefits that independent contractors do not receive, and these include the following:

Health benefits
Retirement benefits
Worker’s compensation
Social security benefits

Employees in California typically receive all of these benefits from their employers.

What are the penalties for misclassification?

Misclassifying workers as independent contractors instead of employees in California can lead to various penalties and legal consequences. The penalties can vary depending on the specific violations and circumstances.

Back Wages and Benefits: If a worker is misclassified as an independent contractor when they should have been classified as an employee, they may be entitled to back wages for unpaid minimum wages, overtime, and any other benefits they were denied due to the misclassification.

Unpaid Payroll Taxes: Employers are responsible for withholding certain payroll taxes from employee wages, such as Social Security and Medicare taxes. Misclassifying employees as independent contractors can result in failure to withhold and pay these taxes, leading to potential penalties and interest for unpaid taxes.

Labor Code Violations: Misclassification can result in violations of various provisions of the California Labor Code. This can include penalties for failing to provide required breaks, meal periods, and rest periods for employees.

Penalties for Failure to Provide Benefits: Employers who misclassify workers may be subject to penalties for failing to provide required benefits, such as workers’ compensation coverage, unemployment insurance, disability insurance, and other benefits mandated by law.

Legal Action by Workers: Misclassified workers have the right to bring legal action against employers to seek compensation for unpaid wages, benefits, and potential damages resulting from the misclassification.

Administrative Penalties: The California Labor Commissioner’s Office can impose administrative penalties on employers who engage in worker misclassification. These penalties can vary depending on the nature and severity of the violations.

Private Lawsuits: Misclassified workers may also file private lawsuits against their employers for damages resulting from misclassification. This can include claims for unpaid wages, overtime, benefits, and potential emotional distress damages.

Criminal Penalties: In some cases of willful misclassification, where employers deliberately misclassify workers to avoid legal obligations, criminal penalties can be imposed under certain circumstances.

Importantly, the penalties for misclassification can vary based on the specific situation, the extent of the violations, and the enforcement actions taken by government agencies or affected workers. Employers should ensure proper worker classification to avoid potential legal and financial consequences. If you have concerns about worker classification or potential misclassification issues, it is advisable to consult with an employment lawyer who can analyze your situation and indicate a path forward.

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