Independent Contractor Misclassification | Tips and Gratuities


Many employers improperly call people “independent contractors” when those people are really employees.

The law defines who is and is not an “employee.” An employer cannot simply make somebody an independent contractor by calling them one.

Independent Contractors are exactly what they sound like: independent. The guy you hire to fix your roof is an independent contractor. He uses his own tools, he is paid a certain amount of money to do a certain job, he has a certain expertise that you don’t have, and he does it on his own time. He really is independent.

Somebody’s assistant, who works in their office, uses their equipment, has certain hours, and is given regular instruction and supervised is not an independent contractor. That person is an employee. And to be an employee, that person does not need to meet all of those qualifications listed above.

The real issue is control. If that employer has a reasonable level of control over what that person does, that person is an employee and there is simply no way around it.
Lots of employers think they are “clever” in the sense that they believe they can just call somebody an independent contractor; or they think that there is a “way around” these laws. There really is not. Again, the law defines who is and is not an employee, and employers cannot just change some names around or have someone “agree” to the contrary.

Rights of Mis-Classified Employees

When an employer calls someone an independent contractor and that person really is an employee, we call it “mis-classification.” A person who is mis-classified as an independent contractor and is, therefore, paid as an independent contractor is likely to have a number of rights:

1. Right to Minimum Wage And/or Overtime Pay
Frequently, people are paid as independent contractors so that they will not receive overtime and sometimes even so that they will not receive minimum wage. Employees who are paid as independent contractors and, as a result, end up not getting overtime and/or not getting minimum wage are entitled to this pay, plus various penalties.

2. Benefits Such as Stock Options 
It is also very common to call someone an independent contractor so that they will not receive benefits of employment, often stock options and stock grants that are given to the regular “employee” part of the employer’s workforce. Employees who are mis-classified as independent contractors and, as a result, do not get these benefits, can make a claim to receive those benefits or the value of those benefits.

3. Health Benefits 
Employees who are mis-classified as independent contractors and, as a result, are denied participation in a company’s health insurance plan may be entitled to make a claim for these benefits.

Further Information Regarding Stock Option/Grant Rights for Independent Contractors

This is a particularly complicated area. The law is not uniform throughout the country on this issue, but in California and the 9th Circuit jurisdiction (California, Alaska, Arizona, Hawaii, and Idaho), there is good law that supports employee rights. This is particularly true in California, which arguably has the best protections for mis-classified employees who, as a result, are denied stock options and stock grants.

The basic theory of these cases goes like this:

Employee stock option/grant programs are generally governed by a program established by a company’s board of directors (by definition, a company that has stock is supposed to have a board of directors). These plans are often subject to certain provisions of the Internal Revenue Code; for example, Section 423 of that Code. And those plans will specifically say that “all employees are entitled to . . . .” and reference stock benefits.

What is interesting about this is that once a company has established a plan like this and has done so according to a certain set of laws, those laws will define who is and is not an employee. And, for example (and this is the most common example), Section 423 of the Internal Revenue Code is very clear that the word “employee” means what the law says it means, not what the employer says it means.

So what has happened in a situation like this is that the company’s board of directors has essentially made a “contract” with all of the “employees.” But if someone is called an independent contractor and does not get the benefits of the contract, that means that the company has essentially breached (or broken) the contract with those employees who did not get the benefits, namely, those who were called independent contractors.
Confused yet? Actually, this is only the beginning and it only gets more complicated from there.

But the bottom line is this: If you have been called an independent contractor, but in truth you work alongside others just like everybody else, one way or the other you have probably been denied something that you were entitled to.

Contact The Law Offices of Jeremy Pasternak

The Law Offices of Jeremy Pasternak provides free consultations to those individuals who believe they have been denied benefits, wages, or other rights they may have because they were mis-classified as independent contractors. Contact us at 415-693-0300 to schedule your free consultation or send an email.