As labor practices evolve and change in the United States, companies are using new tricks to lower labor costs and raise their own margins, all while shifting more burdens, expenses, and responsibilities to employees. It’s illegal, and it results in employees making less while working more and paying more of their own expenses. If you have ever been classified as a contractor, you may qualify.

You might have heard about big legal actions against companies like Uber and Lyft, which have been some of the most prominent cases of misclassification in recent history. By employing drivers as contractors instead of as regular employees, contractors don’t end up getting the same protections and wages as standard employees.

This happens in a wide variety of industries: everyone from call centers, logistics operators, personal services providers, and even office workers are now employed on contracts when legal precedents should have them designated as employees. This leads to millions of dollars of lost compensation each year, money that’s now being recovered by working Americans thanks to ongoing litigation, with many class-action suits and other lawsuits taking place to recover money owed to misclassified employees.

What’s the Difference Between Regular Employees and Contractors?

Regular employees, also known sometimes as non-contract employees, W2 employees, or union employees (these terms have some small legal differences), are subject to protections under the Fair Labor Standards Act of 1938. This act guarantees specific, federally enforced rights for all employees of any company in the US. These rights include:

  • Minimum Wage: A federal minimum wage of at least $7.25 per hour, or the state minimum wage, whichever is higher.
  • Overtime: Employees must receive at least time-and-a-half pay for any time worked over forty hours a week.
  • Compensation for Hours Worked: Employees must be paid for any time spent on duty, on the employer’s premises, or at a designated workplace.
  • Recordkeeping: Employers are required to keep accurate and up-to-date time and pay records for their employees.
  • Child Labor Restrictions: Employees under 18 years of age are subject to child labor restrictions, such as mandatory maximum hour restrictions, school attendance, and restrictions based on when a minor can work.
  • Paying for Work Materials: From computers to uniforms and farm implements, employers are required to pay for most of what an employee needs, with a few notable exceptions.

When employees are misclassified as contract workers, employers are able to get around these restrictions, most commonly skipping out on overtime bonus pay, minimum wage regulations, and avoiding paying for workers’ supplies.

Employee Misclassification Litigation: A History of Defending Employee Rights

As companies shift to models based on the use of contractors, there are more opportunities for wrongdoing. These following cases have set powerful precedents related to the viability (and visibility) of employee misclassification suits.

Dynamex Operations West, Inc. vs. Superior Court of Los Angeles

One of the biggest recent employee misclassification legal actions in recent history, this case involved a transportation and logistics operator using contracted labor to do what was essentially their fundamental business practice. It was eventually settled by the Supreme Court of California, which set out a test for how to classify employment and upheld the alleged claim that these contractors should, indeed, have been classified as employees.

While this lawsuit was specifically filed against Dynamex Operations West, a same-day delivery company, the precedent applies to other companies that use contract drivers to transport cargo or drive people to their destinations, like Uber and Lyft.

This is a great example of the fact that, while all companies fall subject to the same federal legislation, different states have different levels of employee protections, and can thus be more or less conducive to a successful outcome in a lawsuit.

Carter v. Arise Virtual Solutions, Inc.

Arise Virtual Solutions was a company that promised to cut costs for companies like Disney and AirBNB by outsourcing work to workers who took calls from their homes using their own equipment, paid hourly.

Over several years, the company slashed wages, charged contractors for training, and made them use their own equipment. The case was settled in favor of the phone operators, who were remunerated for sub-minimum-wage pay, equipment expenses, and owed overtime.

The most blatant part of this suit, however, is maybe not the lack of protection for the workers themselves, but the fact that Arise required workers to sign contracts to promise not to sue, engage in a class action suit, or even talk about their work. This clause is a violation of the law that would likely not hold up in court, and a good example to show that these types of contracts aren’t always enforceable. Even if you signed a non-disclosure, non-compete, or a no litigation clause, you might still be able to participate in litigation or be part of a settlement.

Uber and Lyft Rideshare Lawsuits

Uber and Lyft suits are actively being litigated right now in the courts, as drivers fight for minimum wages, benefits, and other rights traditionally given to employees. In California, the Dynamex Operations Suit ended up having large implications for rideshare employees as language specific to certain types of contractors was added to legislation regarding the subject.

While this was a step forward for rideshare drivers and other similar contractors, the legislation is California-specific and thus won’t have an effect on the vast majority of Americans, although it’s more than possible that in the near future a suit will be accepted to be decided by the federal supreme court, which would set a strong precedent. There is some speculation that a federal suit would be more likely to rule in favor of companies like Uber and Lyft.

What should I do if I have been affected by Employee Misclassification?

Misclassified employees are owed compensation or damages that come from minimum wages or overtime they didn’t receive. To be misclassified, you have to be a contractor that should’ve been classified as an employee, which means that you can’t be a W2 employee and be misclassified. Employees have more protections than contractors, so they can’t sue.

Secondly, you have to have been wrongly classified. Contract employees exist for a reason, and if you have your own freelancing business, or you controlled most of your working schedule and tasks, or you only performed tasks related to your contract, you are probably rightfully classified as a contract employee.

Thirdly, your rights must have been violated. At any point, did you have to pay for your own equipment? Did you ever work for a wage that ended up being less than $7.25 an hour or for a wage that was less than your state’s minimum wage? Did you work over forty hours a week and not receive additional (time-and-a-half) compensation in a state where that is required? These are all types of damages that can be measured and thus remunerated.

How to know if I qualify to be part of an Employee Misclassification lawsuit?

The most fundamental part of a lawsuit related to employee misclassification is determining whether or not you were, indeed, an employee. You can only have a successful Employee Misclassification lawsuit if you should have been or should currently be classified as an employee instead of a contractor.

Determining Employment Status

Determining if you should be classified as an employee or a contractor can be accomplished by performing a test outlined by the United States Department of Labor. It’s a simple matrix of questions that can be answered by any worker, helping give them some idea of how viable their case is or if, in fact, they should be considered a contractor or an employee according to the current definition of employment

These questions should be answered under the perspective of an ‘economic reality: when looking at both the company and the worker, what do their working habits and tasks say about their status as an employee or employer?

Economic Reality Test

The ‘economic reality’ test contains six questions. We’ll dive into each of them below. Answers fall along a spectrum, with one end signifying a worker is a contractor and the other end meaning that the worker is an employee

  1. Is the work an integral part of the employer’s business?

Contractors are frequently employed for auxiliary tasks that are considered adjacent to the actual business purposes. If a contractor is doing the ‘bread and butter’ work of the business, they should be considered an employee.

While this sounds black and white, it’s more difficult to determine because businesses can argue what their ‘integral’ business function is. Is Uber a ride-sharing surface like a taxi company (drivers are employees), or are they a platform to connect drivers to riders (programmers and customer service agents are employees)?

  1. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?

If you make strategic business decisions that can raise or lower your profits, you’re in business for yourself and a contractor. If you can only raise or lower your profits by doing more or less work, you can probably be considered an employee.

Take the example of a cleaner: if you’re just employed by the hour, you don’t have much room to raise or lower profits. If you can pick your products to raise or lower margins, get paid by the square foot, or can renegotiate your contract, you’re probably correctly classified as a contractor.

  1. How does the worker’s relative investment compare to the employer’s investment?

Do you have to invest in time, money, and energy when you want to expand your business? Can you pick up new clients to expand your business? Or is your economic success dependent on the success of your employer? If you’re entirely reliant on the success of a single client to do well, you’re probably an employee, not a contractor.

  1. Does the work performed require special skill and initiative?

This question discusses the workers’ independence. If you’re assigned a task to complete and have significant input over your process and even the end result, you’re probably a contractor. If you’re required to do the task in a specific way and your outcome and process are tightly controlled, you’re more likely to be an employee.

  1. Is the relationship between the worker and the employer permanent or indefinite?

Contractors are likely to work temporarily, based on a contract with a specific task or duration. Employees are employed indefinitely, with no end date for their contract.

  1. What is the nature and degree of the employer’s control?

Are you truly independent in your decisions? How much control does a particular client have over your livelihood? The more control you have over your work, when you do it, and how you do it, the more likely you are to be considered a contractor. If your employer can control your tasks, your work, your hours, and your wages, you’re almost definitely an employee.

What does the Economic Reality Test mean for my case?

While the Economic Reality Test is a spectrum, the more you fall towards the ‘employee’ answers, the more difficult it will be for employers to claim that you’re a contractor, and thus you will be more likely to be eligible for damages and remuneration for a lawsuit.

Most often employers defend lawsuits by arguing against the first question, claiming that their business is more auxiliary (setting up a platform for independent contractors to work) than direct (providing a service to a final client). This is the most common defense and the most difficult for workers to fight against.

How does an Employee Misclassification lawsuit work?

An Employee Misclassification lawsuit works similarly to other lawsuits, with the first step being the plaintiff (the employee who claims to have been misclassified) coming forward and ‘filing suit’ against the company that contracted them.

It’s also possible for a plaintiff to be added or recruited to an existing suit as an additional plaintiff, most commonly as part of a class-action lawsuit in which a large law firm will represent many plaintiffs for a cut of the settlement.

In some cases, the action is brought forward against a company by a government prosecutor (typically a district or state attorney). In this case, they will represent the plaintiffs, and when a verdict is reached you will be eligible for recompensation even if you weren’t the one filing suit.

Once you’re part of a suit, though, your lawyer will take you through the procedure step by step and will be your representative as things happen, making sure that you are informed about where you need to be, when you need to be.

Do I need a lawyer to join an Employee Misclassification lawsuit?

In the earliest phases of litigation, when exploring the strength of your case, you’ll probably want to enlist the help of a lawyer that can help you determine your eligibility. Depending on the strength of your case and the dollar amount of a potential judgment, you can potentially find a lawyer that will help you on contingency, meaning your lawyer will only be paid if a verdict awards you a judgment.

If you were a contractor for a bigger company, what’s most likely to happen is that you will be put in a pool with other plaintiffs suing the same company, called a class action lawsuit. In this case, your lawyer will almost certainly work on contingency, and you will be less directly involved in the day-to-day of the case. In this case, the possibility of a judgment in favor of you, the plaintiff, is high.

Am I a contractor or a regular employee?

You’ll only be able to pursue litigation if you’ve been designated as a contractor, therefore it’s important to know what type of worker you are. The answer lies in your tax paperwork. If you got a W2 from your employer that lists tax withholdings and social security paid, you’re a regular employee.

If you get a simple I9 at the end of the tax year, paperwork that only lists your earnings without withheld taxes, you’re a contractor (or you’re self-employed with your own business, in which case you’re not eligible for employee misclassification). Self-employed people and contractors must pay an additional amount in taxes that traditional employers are required to pay on behalf of their employers.

If you withhold your own taxes and don’t own your own business, you’re probably a contractor and could be eligible for an Employee Misclassification suit.

Do different states have different employment rules?

While typically Employee Misclassification lawsuits fall under the purview of the federal government, but different states have slightly different rules that can affect both the potential dollar amount of a judgment and the likelihood that litigation is successful.

States with legislative environments more favorable to employees (often traditionally Democratic states with large union presences like New York and California) are more likely to go after companies in a significant way, with class actions lead by state attorney generals and teams of government-backed, skilled prosecutors.

How long does it take to settle an Employee Misclassification lawsuit?

As with most corporate litigation, Employee Misclassification lawsuits can take a really long time to sort out. It’s not uncommon to see several years of depositions, motions, and delays in long trials. While it’s frustrating for plaintiffs, it’s important that companies who break the rules are held accountable. In fact, postponing and delaying a settlement as long as possible is a tactic to deter plaintiffs from sticking with the lawsuit.

If you’re eligible to participate in an Employee Misclassification suit and need money now, look into ‘lawsuit loans,’ a type of loan that gives you cash immediately against the possibility of a likely verdict. For lawsuits like this, it’s an attractive option as judgments can take years to go through.

What is the statute of limitations on an Employee Misclassification lawsuit?

While sometimes Employee Misclassification lawsuits can fall under a specific state’s purview, where rules can vary drastically, most Employee Misclassification lawsuits are litigated federally and thus are subject to IRS processes and regulations.

The statute of limitations that the IRS has to assess a penalty against a company for misclassification is within three years after the tax returns related to the employee’s misclassification are filed. That means that employees typically can have up to 4 years to begin action against a company for misconduct.

Even if you were later reclassified as a W2 or permanent employee, original classification as a contractor can mean you’re eligible for compensation. Any period of time where you were classified as a contractor and shouldn’t have been, you’ll be eligible.

How much can you get from an Employee Misclassification lawsuit?

Employee Misclassification lawsuits will almost never yield multi-million dollar payouts, but they can represent a quite healthy sum of money when litigated properly. One advantage that Employee Misclassification lawsuits have over other types of suits is the fact that HR records and payment records typically exist, meaning it’s easy to calculate exactly how much money is owed.

If you work for a small employer, a judgment can be up to around a year’s wages, including punitive damages. In smaller cases with smaller companies, employers sued are relatively likely to settle, as lawyer fees can quickly get out of hand during ongoing litigation. Larger companies are more likely to draw out legal action over long, frequently delayed trials as a tactic to discourage plaintiffs.

What can I get compensated for in an Employee Misclassification lawsuit?

Plaintiffs often wonder exactly how payments are awarded. While it sometimes feels like a bit of black box, calculations are actually more or less black and white. The determination that leads to an eventual settlement can be roughly estimated and outlined by some simple math. If you want the most precise range possible, you’ll consult your lawyer, but you can get fairly close by using the following.

  • Owed Wages: If your expenses yield a wage that’s less than the state or federal minimum, you’ll have the opportunity to recover those wages.
  • Overtime: If you worked more than 40 hours a week and weren’t paid overtime, you’ll get all of that money back in a lawsuit with a positive result.
  • Expenses: Whether it’s computer equipment, gasoline, or your own car’s mileage, if you were wrongly classified you may be eligible to have these expenses remunerated in a lawsuit.
  • Self-Employment Tax: Typical W2 employees get about 7% of their wages in form of a tax that’s paid by their employer. Contractors have to pay that out of their own pocket, which can really add up.
  • Interest: You can get paid interest on money awarded in a judgment predating the lawsuit and as the lawsuit is settled if the defendant doesn’t pay in a timely manner. This is typically around 7% per annum.
  • Punitive Damages: Punitive damages aren’t awarded to compensate for damages; they’re awarded to punish defendants whose classification is grossly negligent or intentionally ill-natured. In cases where employers intentionally classified employees as contractors to save money and pad their own pockets, these punitive damages can be the largest part of the judgment.
  • Litigation Costs: You’re often eligible to have your attorney costs covered in the event of a positive verdict. This means that your legal bill won’t come out of your own pocket.

How long does it take to get your money after you settle a lawsuit?

There are a couple of factors that can affect how quickly you can get your payout after a positive verdict or a settlement. The court system is slow-moving, but if you’ve successfully settled, you’re just inches away from the money in your account. In many cases, you’ll just get a check in the mail: this is probably one of the best results for a plaintiff.

When a class action judgment is awarded, a fund will be set up to compensate the victims. The structure and size of this fund can really depend on lawsuits, with some settlements set up as an annuity that pays out over years of years, occasionally paying out for plaintiffs and claimants that haven’t even filed suit yet.

What about a settlement?

In a settlement, an agreement (typically monetary) is reached by the two parties to avoid an uncertain verdict that can be handed down by the court. In this case, you and/or other plaintiffs will consult with professional counsel to weigh the risks and rewards of this settlement. A judge will also evaluate the settlement to make sure it provides ‘fair and adequate compensation’ to members of the class action suit.

Typically, if there are no hiccups, plaintiffs will wait approximately 6 weeks for a check to go through, although in some cases it can take longer. At this stage, make sure to maintain contact with your legal representatives, as sometimes things are lost or missed by plaintiffs, attorneys, and/or court staff.

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