October 24, 2024

Best Practices: Worker Classification

Classifying workers correctly is crucial for employers. Misclassifying workers as independent contractors can lead to hefty fines and liabilities for unpaid employment taxes and unmet legal obligations like wage and hour requirements. Federal and state agencies have increased audits, and there has been a rise in employee class action and PAGA lawsuits. 

For an individual to be protected by wage and hour laws, they must be classified as an ‘employee.’ Independent contractors or ‘gig workers’ are not considered employees and are therefore not subject to minimum wage, overtime pay, or other legal requirements with respect to employees. 

Under California’s ABC Test, with certain exceptions, to qualify as an independent contractor, the hiring entity must prove the following:  

  • The worker is free from the control and direction of the hirer in connection with the performance of the work;  
  • The worker performs work that is outside the usual course of the hiring entity’s business; and  
  • The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.  

Most importantly, under the ABC Test, workers are presumed to be employees; the burden of proving that an individual is properly classified as an independent contractor falls to the hiring entity.i  

In Arizona, the state law definition of ‘independent contractor’ depends on the circumstances to which it is being applied. There is no one established definition. Instead, various state laws carry their own definitions (e.g., Workers’ Compensation laws, Arizona Civil Rights Act, Legal Arizona Worker’s Act, minimum wage and paid sick time laws). Nonetheless, each statutory scheme typically applies a test that balances factors such as the degree of control the employer exercises over the individual (i.e., “the control test”) and the whole of the circumstances surrounding the work relationship (i.e., “the totality of the circumstances test”). Both of these tests closely align with federal law. 

Given the complex nature of employee classification, employers should seek legal counsel before classifying employees as independent contractors.