California’s minimum wage is making headlines again. Entrepreneur Joe Sanberg is financing the Living Wage Act of 2022 ballot initiative, which seeks to increase the minimum wage from $15 to $18 per hour by 2025.
Current Minimum Wage in California
As you’re likely aware, California implemented annual increases to the minimum wage in 2017, culminating in the minimum wage being lifted to $15/hour for employers with 26 or more employees on January 1, 2022. Employers with 25 or fewer employees were given an additional year to increase wages, meaning that they will be required to pay a minimum wage of $14/hour in 2022 and will need to lift the hourly wage to $15 on January 1, 2023.
Increasing Risk Associated with Misclassification of Employees
With increasing wages comes increasing costs for businesses. As a result, you may be considering classifying workers as contractors instead of employees. In fact, it’s quite common for startups to err on the side of classifying individuals as contractors, because it’s easier from a payroll perspective. This is a risky business decision, however.
When you hire a contractor, the company does not provide benefits such vacation or sick leave to the contractor and wage and hour laws do not apply. Additionally, the company is not responsible for withholding or paying any income, payroll, Social Security, or other taxes, including for unemployment or disability. The company also does not have to obtain workers compensation insurance for the individual.
If the individual later challenges their classification and wants to be treated as an employee instead of a contractor, the company could be on the hook for significant back taxes to the government, as well as unpaid minimum wages, overtime wages, meal and rest period premiums and other penalties.
Equity In Lieu of Wages Not a Legal Workaround
Another workaround startups often consider is offering benefits to employees, like equity, in lieu of actual wages. But this isn’t legal.
California has strict minimum wage laws and the state does not distinguish between owners/founders employees and other employees. This means that owners and founders who are employees of the company are entitled to (at least) minimum wage.
Startups often rely on the mentality that founders aren’t likely to make a claim against their company for not receiving minimum wage. This can be true – if the relationship between the founders stays intact. But (potentially expensive) issues can arise if a disgruntled founder leaves or is removed and they make a claim for unpaid wages.
Another thing to consider is that employees can only be considered exempt employees if they make at least double the state minimum wage and spend more than 50% of their time performing exempt level work. This means founders must be paid double the minimum wage (or more) s and spend more than half their time on exempt tasks to avoid misclassification claims.
If you need specific advice for your company, reach out. Our employment attorneys would love to help.
Another Key Consideration: Implementing Robust Agreements when Hiring Independent Contractors.
If a worker is correctly classified as an independent contractor (not an employee), you will want to implement robust but practical independent contractor agreements. In this week’s 5 Tip Friday segment, we discussed how companies can build efficiency into their independent contractor agreements:
Read it here: https://cgl-llp.com/insights/managing-independent-contractor-compliance/
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