Are There State-Specific Laws Regarding Employee Misclassification?

Understanding employee classification laws is critical for both workers and employers. These laws not only protect workers’ rights but also provide businesses with clear standards to avoid costly legal disputes. Misclassifying employees as independent contractors can lead to significant penalties, legal liabilities, and reputational harm. Both federal guidelines and state-specific laws play a pivotal role in addressing this issue, creating a complex legal framework that demands careful attention. Miller Shah helps employees navigate both federal and state regulations surrounding misclassification, ensuring compliance and mitigating risk. 

Federal Guidelines on Employee Misclassification

Misclassification occurs when employers incorrectly label employees as independent contractors, depriving them of rights such as overtime pay, unemployment benefits, and health insurance. At the federal level, the Fair Labor Standards Act (FLSA) provides guidance on determining whether a worker is properly classified as an employee or an independent contractor.

The Department of Labor issued a Final Rule, effective March 11, 2024, outlining how it approaches this determination.  The Final Rule adopts the economic reality test, which sets forth a structured approach to evaluate whether a worker is economically dependent on an employer or operates independently. Key factors under this federal test include the extent of control the employer exercises, the investment made by the worker, and the degree to which the work performed is integral to the employer’s business. Federal guidelines are essential for establishing a baseline for classification, but they leave room for interpretation—a complexity that individual states have sought to address through their own laws.

Examples of State-Specific Misclassification Laws

Several states have introduced employment classification laws with stricter standards than the minimum floor set by federal regulations, aiming to better protect workers and ensure compliance. California and New York present two examples of states that have enacted additional employee classification statutes. 

California

California’s Assembly Bill 5 (AB-5) has drawn national attention for its groundbreaking approach to addressing misclassification. Under California’s AB-5 law, a worker is presumed to be an employee unless the hiring entity can prove all three aspects of the ABC test: 

• A: The worker is free from the control and direction of the hiring entity in connection with their work, both contractually and in practice. 
• B: The worker performs work that is outside the usual course of the hiring entity’s business. 
• C: The worker is engaged in an independently established trade, occupation, or business of the same nature as the work performed. 

Although there are certain exceptions to the ABC test, this difficult standard is generally more favorable to employees, as it requires employers to prove all three prongs.  The presumption in favor of employee status helps ensure that only true independent contractors meet the classification criteria. 

New York

New York has enacted two key laws to address employee misclassification: the Construction Industry Fair Play Act (2008) and the Commercial Goods Transportation Fair Play Act (2014). Like California’s ABC test, these laws establish a default employee status for workers in construction and commercial goods transportation unless employers meet strict criteria to classify them as independent contractors.  Unlike the ABC test, however, these laws are limited to the construction and commercial goods transportation industries.

To enforce compliance, New York’s statutes provide for penalties including civil fines, payment of back wages, and required tax contributions. In one notable instance, New York’s Joint Enforcement Task Force uncovered over $300 million in wage theft due to misclassification in a single year, highlighting the significant impact these laws have on protecting workers’ rights.

Master Misclassification with Miller Shah

Navigating federal and state-specific employee classification laws is no small feat. Whether you are a worker seeking to protect your rights or an employer striving for compliance, professional legal guidance is crucial. The attorneys at Miller Shah offer sophisticated solutions tailored to your employee classification needs. Contact us today to discuss your case and protect your interests as the labor and employment landscape continues to evolve.