The Independent Contractor Misclassification Trap — and the Back Wages It Creates

California has one of the strictest independent contractor tests in the country. AB 5 codified the ABC test: to classify a worker as an independent contractor, an employer must prove all three prongs. Most California workers labeled as independent contractors fail at least one prong and are legally employees — entitled to overtime, breaks, expense reimbursement, and workers’ compensation.

The ABC Test

Under Labor Code §2775, a worker is an employee unless the hiring entity proves: (A) the worker is free from control in performing the work; (B) the work is outside the usual course of the hiring entity’s business; and (C) the worker is customarily engaged in an independently established trade. All three must be satisfied. Failing any one makes the worker an employee as a matter of law.

What Misclassification Costs the Employer

Every hour worked by a misclassified worker as overtime is unpaid overtime. Every missed meal and rest break is a premium violation. Every business expense the worker paid out of pocket is an unreimbursed expense under Labor Code §2802. PAGA penalties apply to every violation for every pay period. The exposure on a misclassification case involving multiple workers over two or more years is typically in the hundreds of thousands of dollars.

What Misclassified Workers Are Owed

A successfully reclassified worker can recover three years of unpaid overtime, three years of break premiums, all unreimbursed business expenses, waiting time penalties on the final paycheck, and wage statement penalties. The PAGA notice adds civil penalties on top of all of it.

Educational use only. Not legal advice. Justice Foundation.