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California DLSE and Employee Misclassification

April 19, 2010

As California Employment and Labor Lawyers, we are experienced in understanding the legal complexity surrounding the differences between an "employee" and an "independent contractor," in the workplace, as we recently discussed in a blog. Employee misclassification can lead to substantial employer liability resulting in violations of federal and state laws.

According to the California Department of Industrial Relations' Division of Labor Standards Enforcement (DLSE), in recent years many employers have reclassified their workers from "employees" to "independent contractors," to cut the cost of workers' compensation insurance, to not have to payroll taxes, minimum wage or overtime, pay for unemployment or disability insurance, social security, or comply with other wage and hour laws like providing rest breaks or meal periods that came with workers who were previously classified as "employees."

In the groundbreaking California case "JKH Enterprises v. Department of Industrial Relations" from 2006, that highlighted the dangers of improper classification, the courier business company JKH had reclassified the company drivers as independent contractors, after the Labor Commissioner issued a stop order pursuant to Labor Code section 3710 following an inspection of the company's employment practices. In the second round of inspections, JKH was issued another stop order and fined a penalty of $1,000 per driver.

Although JKH appealed the stop order and penalty assessment, it was determined by the hearing officer that JKH Enterprises had failed to show proof that the workers were independent contractors. It was established by the hearing officer that the drivers of the company were integral to the package delivery service, and thus indicated an employment relationship.

After the hearing officer's decision was challenged by JKH unsuccessfully, it was affirmed once again in the District Court of Appeal. The California Supreme Court denied a petition for review, and the decision became final, proving to be a source of authority for future enforcement actions by the Labor Commissioner.

The DIR stated that although JKH is a courier company, the decision in this case is equally applicable to all industries. The Department of Industrial Relations urges all employers to be aware of the decision in this case, as misclassifying employees can lead to substantial consequences including:

  • Stop orders and penalty assessments in compliance with Labor Code section 3710.1
  • Wage and hour law violations: liability for overtime compensation, pay for meal periods, and all other remedies that are available to workers under the Labor Code and Orders of the Industrial Welfare Commission
  • When workers' compensation insurance is not secured, employers can be responsible for exposure for tort liability for employees who have sustained injuries in the workplace.
  • Exposure to unfair business practices
  • Criminal liability
  • Tax liability and penalties

The DIR recommends that California businesses who are considering hiring independent contractors to regularly perform work that is integral to the business of the company, should contact a California Employment and Labor Attorney for legal advice first, to avoid serious legal issues in the future.

In cities in Orange County and throughout Southern California, our Anaheim-based Labor & Employment Attorneys know how to find the best solution to your labor or employment issue. Contact Howard Law, PC today.

Fair Labor Standards Act Advisor: Exemptions, United States Department of Labor

Misclassification of Workers as "Independent Contractors" Rebuffed by the California Court of Appeal, California Department of Industrial Relations (DIR), Division of Labor Standards Enforcement, (DLSE)

Independent Contractor Versus Employee, California Department of Industrial Relations (DIR)

Related Web Resources:

California Department of Industrial Relations (DIR): The Division of Labor Standards Enforcement (DSLE)