Times are tough, even for the government. There is speculation regarding a perceived increase in audits conducted by the California Employment Development Department (EDD) since the beginning of the year, which is being attributed to an anticipated budget shortfall. The audits initiated by EDD focusing on the misclassification of workers as independent contractors are considered a temporary measure to address the budgetary deficit. 

Increased focus or not, employers should keep the following best practices in mind: 

Different Tests for Classification: 

• California classification reviews typically begin with the ABC Test presumption; that all workers are employees. However, multiple exceptions to the ABC Test could shift the analysis to the multifactor Borello test.   

• In some cases, the economic realities test under the Fair Labor Standards Act may be used to determine worker classification.  

The Actual Relationship Determines Status: 

• Employers need to remember that the actual relationship determines the classification. Being labeled an independent contractor, signing an agreement stating one is an independent contractor or being paid as an independent contractor does not determine employment status.  

Multiple Layers of Liability: 

• If EDD, the Labor Commissioner or another part of the Labor and Workforce Development Agency (LWDA) finds that workers are misclassified, employers may face significant liability for restitution and penalties (e.g., payment of minimum wages and overtime, payment of unemployment insurance taxes and providing workers’ compensation insurance). This includes being required to pay the employees’ share of payroll taxes, along with penalties and interest.  

• Civil penalties may also be assessed for violations resulting from a worker being misclassified, including penalties for willful misclassification.  

Audits and Training: 

• Conducting an internal review of current worker classifications is a proactive step that will help employers identify and address potential risks associated with misclassification.  

• Training all hiring personnel is also an effective way to avoid potential assessments and costly litigation. 

Understanding and correctly applying worker classification laws is crucial for employers to avoid substantial liabilities and penalties. By focusing on the actual relationship between the employer and worker, conducting regular audits and providing thorough training to hiring personnel, companies can safeguard against the risks of misclassification.