Yesterday the California Labor Commissioner announced a $265,000 settlement on behalf of five workers who were found to be misclassified as independent contractors by a San Francisco-based house cleaning service. While the positions are not typically those found in enterprise contingent workforce programs, the case does illustrate the level of risk companies run when they misclassify workers.

The Labor Commissioner, Julie A. Su, reached the $265,000 settlement on behalf of five workers who were victims of wage theft while employed at San Francisco-based Marina’s House Cleaning. The employees, who typically worked over 10 hours a day, will receive an average of $50,000 each in back pay.

California’s Department of Industrial Relations (DIR) Division of Labor Standards Enforcement (DLSE), also known as the Labor Commissioner’s Office, is chartered with enforcing prevailing wage rates and apprenticeship standards in public works projects, inspects workplaces for wage and hour violations, adjudicates wage claims, investigates retaliation complaints, issues licenses and registrations for businesses and educates the public on labor laws. They are also responsible for investigating worker misclassifications.

Their investigation of the cleaning company began last October after the Spanish-speaking workers visited the Labor Commissioner’s San Francisco office to learn about their rights under California’s labor laws. Investigators determined that the employees had been incorrectly designated as independent contractors and were also paid less than minimum wage with no overtime. They were often required to clean 12 to 15 houses each day, which forced them to skip meal periods and rest breaks.

“With this settlement, workers who were once exploited and denied their right to a just day’s pay for a hard day’s work are finally getting the wages they earned,” said Labor Commissioner Su. “Employers who knowingly misclassify workers as independent contractors commit wage theft, deprive their employees of basic rights and gain an unfair competitive advantage over businesses that abide by the law.”

While this settlement justifiably received a lot of attention because of the size of the payment to each aggrieved worker, the more significant figure was the estimate that worker misclassification results in an estimated loss of $7 billion each year in payroll tax revenue for the state of California. In addition, the Commissioner noted that employees who are misclassified as independent contractors are often underpaid and do not have on-the-job benefits and protections including workers’ compensation coverage, family leave, unemployment insurance, the right to organize or join a union, and protection against employer retaliation.

This example from California is a cautionary tale for companies across the United States – Federal, state and local agencies are very interested in protecting workers rights, classifying workers correctly, and collecting the employer tax revenues they believe they’re entitled to. Engaging independent contractors in your business is perfectly legal, so long as you do it right. You need an expert on your side.