The vast majority of worker misclassification cases brought forth by federal or state regulators are settled long before they reach a court. Instead of a long and costly fight, with the unpleasant risk of becoming headline news, most companies elect to settle. These companies admit their mistake, pay the required back taxes and penalties, and move on. However, some companies choose to fight in court. As these cases get decided we gain a rare public glimpse into the true costs of incorrectly classifying workers as independent contractors instead of employees.

Recently, the resolution of two such cases were announced in California:

  • National Consolidated Couriers Inc. agreed to pay $5 million in unpaid wages and damages after it was determined by the US Department of Labor that they misclassified more than 600 delivery drivers as independent contractors. Major factors against the San Leandro-based firm included: Requiring drivers to operate at its direction and wear badges, they were also subject to discipline by the company and did not negotiate pay. To make matters worse, during the course of the federal investigation the company tried to destroy records which showed an employment relationship with drivers.
  • Stanford Yellow Taxi Cab of Mountain View, was assessed $3 million in back pay and damages for misclassifying dozens of drivers as independent contractors. Major factors against the company: They required drivers to be on the job six days per week for 12-hour shifts but did not compensate them for all hours worked. Drivers were forced to abide by a dress code, and were not allowed to change their schedules or operate independently by reaching out directly to passengers. The company also threatened and intimidated drivers who were cooperating with investigators.

“As these court rulings indicate, the tide is turning against those employers who misuse independent contractor status to take advantage of workers,” said Regional Solicitor Janet Herold of the Labor Department’s Western Region, who litigated both of these cases. “The courts recognize the nature of this problem and stand ready to ensure that justice is served.”

“Misclassification is workplace fraud, plain and simple,” said US Secretary of Labor Thomas Perez. “It hurts workers by denying them a fair day’s pay for a fair day’s work, and it also undermines the competitiveness of businesses that are playing by the rules. At the Labor Department, through vigilant and vigorous enforcement, we are cracking down on irresponsible employers who game the system and cheat their employees — and that’s what they are: not contractors, but employees.”

As these examples illustrate, misclassifying employees as independent contractors can be very expensive. In fact, the costs are even greater – what is not reflected in the above figures are attorney’s fees, management time, and brand damage. It is also not uncommon for plaintiff’s attorneys to follow with a class-action lawsuit against the company.

After reading this article one might be tempted to conclude that the easiest approach is to never engage an independent contractor. Given the accelerating growth of the flexible workforce, which includes many legitimate independent contractors, this conclusion would be a mistake…potentially limiting a company’s ability to attract and retain the talent it needs to get work vital done.

The reality of the current regulatory and employment environment is that independent contractor status is still perfectly legal and acceptable, so long as the worker falls within the complex definition of the various federal and state agencies who care about proper worker classification. For companies that want to engage flexible workers, including independent contractors, it pays to think through their business models, appropriately assess workers and projects for IC compliance, and then engage workers appropriately. Fortunately for them there are proven IC compliance and engagement experts, like TalentWave, who can help them to safely and cost-effectively engage all their valuable flexible workers regardless of classification.