Independent Contractor Misclassification: The Tests, the Gig-Economy Lawsuits & What Workers Can Recover

Misclassification happens when a company labels a worker an independent contractor even though the worker is legally an employee under the applicable test — the FLSA economic realities test, a state ABC test, or the common-law right-to-control analysis. The label on the contract or the fact that a worker is paid on a 1099 basis does not decide the question; courts look at the actual working relationship. Misclassified workers lose minimum wage and overtime protection, expense reimbursement, unemployment insurance, workers' compensation coverage, and access to employee benefits.

The ABC test presumes a worker is an employee unless the hiring company proves all three prongs: (A) the worker is free from the company's control and direction in performing the work; (B) the work is outside the usual course of the company's business; and (C) the worker is customarily engaged in an independently established trade or business of the same nature. The California Supreme Court adopted it in Dynamex v. Superior Court (2018), and the Legislature codified and expanded it in AB 5 (effective 2020). Massachusetts and New Jersey apply their own ABC-test versions. Prong B is usually the hardest for companies to satisfy — a delivery company arguing its delivery drivers work outside its usual course of business is a difficult position.

The economic realities test is the standard courts use under the federal Fair Labor Standards Act. It asks whether the worker is, as a matter of economic reality, in business for themselves or economically dependent on the employer. The U.S. Department of Labor's 2024 rule describes six non-exhaustive factors: opportunity for profit or loss depending on managerial skill; investments by the worker and the employer; permanence of the relationship; the nature and degree of the company's control; whether the work is integral to the company's business; and the worker's skill and initiative. No single factor controls — courts weigh the totality of the circumstances.

Depending on the jurisdiction and the claims, remedies can include unpaid minimum wage and overtime, liquidated (double) damages under the FLSA, reimbursement of business expenses such as mileage and equipment (in California, under Labor Code section 2802), meal- and rest-break premiums, waiting-time and wage-statement penalties, interest, and attorneys' fees. In California, workers can also pursue civil penalties on the state's behalf through a PAGA action. Amounts vary widely by case; nothing is recovered unless the claims succeed or settle.

Often the claims must be pursued in individual arbitration rather than a class action, because most gig-economy contracts include an arbitration clause with a class action waiver, which the U.S. Supreme Court enforced in Epic Systems v. Lewis (2018). But there are exceptions: the Federal Arbitration Act exempts transportation workers engaged in interstate commerce, an exemption the Supreme Court has read to cover certain drivers and logistics workers, and California PAGA claims are partially insulated from waivers. Some workers have also turned the clauses against companies through coordinated mass arbitration filings.