Employee classification is one of the most important yet complex issues that California employers face. Misclassifying workers can lead to a host of legal problems, including lawsuits under the Private Attorneys General Act (PAGA). Inaccurate classification—whether it’s mistakenly labeling an employee as exempt from overtime or calling an employee an independent contractor when they should be a regular worker—can result in significant penalties and fines. Below, let’s explore how to prevent PAGA lawsuits with proper employee classification in California.

 

Learn why proper employee classification matters, how misclassification can lead to PAGA claims, and what steps you can take to ensure your workers are properly classified under California law.

 

Why Proper Employee Classification Matters

 

In California, the way employees are classified determines several things, including whether they are eligible for overtime pay, meal and rest breaks, and other labor protections. Workers are typically classified into two categories:

 

1. Exempt: These employees are not entitled to overtime pay or certain other protections under California labor laws. Exempt employees usually have specialized job duties and receive a salary above a specific threshold.
2. Non-Exempt: These employees must be paid overtime for any hours worked over 8 in a day or 40 in a week, and they are entitled to meal and rest breaks.

 

The other key distinction in classification is between employees and independent contractors. Independent contractors are self-employed and not entitled to most employee benefits, such as overtime, meal breaks, or paid sick leave.

 

Proper employee classification is crucial because misclassification can lead to serious legal consequences, including PAGA claims.

 

How Misclassification Leads to PAGA Lawsuits

 

The Private Attorneys General Act (PAGA) gives employees the right to sue their employers on behalf of themselves and other workers for labor law violations. Misclassifying employees is a common violation that can trigger a PAGA lawsuit. Here are the most common scenarios where misclassification leads to legal trouble:

 

1. Misclassifying Non-Exempt Employees as Exempt

 

If a worker is incorrectly classified as exempt, they may be denied overtime pay, meal and rest breaks, and other rights that non-exempt employees are entitled to under California law. Employees who don’t receive these benefits can file a PAGA claim, seeking penalties not only for themselves but for other misclassified employees as well.

 

2. Misclassifying Employees as Independent Contractors

With California’s AB-5 law, the standards for classifying workers as independent contractors have become more stringent. The “ABC Test” determines whether a worker can be legally classified as an independent contractor. If a worker is misclassified, they can claim that they were denied basic employee rights, such as overtime, paid sick leave, and unemployment insurance.

When a worker brings a PAGA claim for misclassification, it can quickly become a large-scale lawsuit, involving many employees and leading to significant penalties.

 

 

Understanding the ABC Test for Independent Contractors

 

Under California’s ABC Test, a worker is considered an independent contractor only if all three of the following conditions are met:

 

1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work.
2. The worker performs work that is outside the usual course of the hiring entity’s business (i.e., they are not performing the core work of the company).
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

 

If an employer cannot meet all three conditions, the worker must be classified as an employee, not an independent contractor. Misclassifying an employee under this test can lead to a PAGA lawsuit.

 

The Dangers of Misclassifying Employees as Exempt

 

Misclassifying non-exempt employees as exempt is a common issue. Employers often do this to avoid paying overtime, but it comes with significant risks. Exempt employees must meet specific criteria:

• They must primarily perform executive, administrative, or professional duties.
• They must regularly exercise independent judgment in their work.
• They must be paid a salary that meets California’s minimum wage for exempt employees, which is higher than the state’s general minimum wage.

 

If an employer incorrectly classifies an employee as exempt and denies them overtime, meal breaks, or other benefits, it opens the door to a PAGA claim.

 

How to Properly Classify Employees and Avoid PAGA Claims

 

Now that we’ve covered how misclassification leads to PAGA claims, let’s talk about how you can prevent them by properly classifying your employees.

 

1. Understand the Job Duties Test for Exempt Employees

To classify an employee as exempt, you must carefully assess their job duties. They must perform specific tasks, such as managing other employees, making important business decisions, or performing work that requires advanced knowledge in a field like law or medicine. Simply paying an employee a salary does not make them exempt.

 

Review the job description for each role to ensure the employee’s duties meet the requirements for exempt status. It’s essential to make sure employees classified as exempt truly have the job responsibilities that qualify them.

 

2. Use the ABC Test for Independent Contractors

Before classifying a worker as an independent contractor, apply California’s ABC Test. If you cannot prove that the worker meets all three parts of the test, you must classify them as an employee. Misclassifying independent contractors is one of the fastest ways to land yourself in a PAGA lawsuit.

 

3. Keep Detailed Records

Keeping accurate and detailed records is key to protecting your business from PAGA claims. Make sure you document the duties of exempt employees and maintain records of any work agreements with independent contractors. Having clear records can help you prove compliance if a lawsuit arises.

 

4. Conduct Regular Audits

Employee roles and responsibilities often evolve over time. Conduct regular audits of your workforce to ensure that employees are still properly classified. Review job duties, pay structures, and working conditions to ensure continued compliance with California’s labor laws.

 

5. Train HR and Management on Classification Rules

Misclassification often happens because employers and managers don’t fully understand California’s labor laws. Make sure your HR team and management are trained on proper employee classification. This will help prevent mistakes that could lead to costly PAGA claims.

 

Have Questions About Misclassification of Employees in CA?

 

Employee misclassification is a serious issue in California and one of the most common reasons employers face PAGA lawsuits. By understanding the differences between exempt and non-exempt employees, using the ABC Test for independent contractors, and regularly auditing your classification practices, you can significantly reduce your risk of facing a PAGA claim.

 

Proper employee classification isn’t just about following the law—it’s about protecting your business from expensive litigation. Make sure you take the necessary steps to classify your workers correctly and stay compliant with California labor laws. This will help you avoid costly penalties and lawsuits down the road.

 

Contact Rupal Law today at (951) 460-0830 to speak to a California Employment Law Defense attorney who can assist you. Rupal Law can assist you with all of your employment law and business law needs.