The Risks of Misclassification in Creative Production
A guide to understanding the legal, financial, and operational risks.
In the creative production industry, it’s common to work with freelancers, many of whom are accustomed to being paid as independent contractors. However, under California law, worker classification is not a matter of preference or convenience. It is a legal determination based on the nature of the working relationship, and the hiring entity (not the worker) is responsible for making that determination in compliance with the law.
Misclassifying a worker can lead to serious legal and financial consequences, regardless of industry norms. This guide breaks down some of the risks of misclassification and offers guidance on how to respond when a freelancer expresses confusion or resists being classified as an employee.
For more information on how classification works, check out our resource page on Worker Classification in California.
How is misclassification exposed?
There are two primary ways in which a misclassification issue can surface:
Audits by Government Agencies
Agencies such as the IRS (federal) and the EDD (California) can audit your business to determine whether workers are classified correctly. These audits often take several years and can escalate quickly.
If a worker was incorrectly classified as an independent contractor, your business can be held responsible for:
Income and employment taxes that should have been withheld.
Unpaid workers’ compensation premiums.
Significant penalties and interest.
Wage and Hour Claims
If a misclassified worker files a claim or lawsuit against your business, they may seek damages for:
Missed meal and rest breaks.
Unpaid overtime.
Lack of sick leave or reimbursement for business expenses.
Missing or incorrect pay stubs.
Waiting time penalties for late payments.
Many of these claims can turn into class or representative actions, dramatically increasing the business's liability. Legal fees, back pay, and penalties can easily reach six or seven figures, even for short-term projects.
It’s important to note that most standard business insurance policies, including employment practices liability insurance (EPLI), do not cover wage and hour claims unless a specific (and often expensive) rider is added.
What is the potential cost of misclassifying a worker?
We asked attorney Sarah Léger, Esq. of Ragghianti | Freitas LLP to provide an example of the potential cost of misclassifying a single worker for a one-day shoot.
In this scenario, a freelance worker is hired for a one-day shoot at $800/day. They are engaged as an independent contractor and work for ten hours. The production does not enforce scheduled breaks, so the worker takes their lunch break late and skips their rest breaks.
Potential Damages:
Overtime: $300
California law mandates that a day rate can only cover 8 hours, so the worker’s “hourly rate” is $100 per hour. Since they worked 10 hours, they are owed 2 hours of overtime at 1.5 times the hourly rate.
Meal and rest break penalties: $200
The worker is owed the equivalent of one hour of pay for not taking a timely lunch break.
The worker is owed the equivalent of one hour of pay for skipping rest breaks.
Late payment waiting time penalties: $33,000
Since the business did not pay the overtime owed at the end of the shoot, waiting penalties equivalent to the average daily rate accrue each day that the worker is not paid, for up to 30 days. This worker is owed $1,100 x 30 days.
Misclassification fine: $5,000-$15,000
First-time violations receive penalties of $5,000-$15,000
For a pattern of misclassification, penalties can rise to $10,000-$25,000
Total for misclassifying one worker for one day:
$38,400-$58,500, plus additional IRS penalties, legal fees, and exposure to class or PAGA actions.
How to respond to common pushback on classification.
In creative production, tight deadlines, worker preferences, and outdated advice can lead to pushback from workers on classification. Many freelancers are accustomed to being paid as independent contractors and are confused or frustrated when they are classified as employees. We’ve outlined two common examples of pushback below. In these situations, it is important to educate the worker on the fact that classification is a legal determination and not an individual choice.
“My tax advisor says I can stay a 1099.”
While tax advisors may offer guidance on individual tax filings, they are not experts in employment law or corporate hiring practices. Their advice is often given without understanding the full context of the working relationship.
It is the hiring party, not the worker or their tax professional, who is legally responsible and liable for proper worker classification.
Tax advisors are not employment attorneys. They can be held liable for giving clients misleading information about classification.
“Can I just sign a contract to stay a contractor?”
No. A signed agreement does not override labor law, and workers cannot waive their rights under employment regulations.
Even if a worker agrees to be treated as an independent contractor, they can still bring a misclassification claim in the future if they decide they should have been classified as an employee.
A class action suit brought by another worker on the same project could incorporate other workers, even if they maintain their desire to be classified as independent contractors.
Courts consistently reject contracts that attempt to sidestep legal employee protections.
Classification is a legal decision.
If you’re hiring someone to work under your direction, follow your schedule, and contribute to your deliverables (especially in California!), there’s a good chance that they should be classified as an employee and paid via payroll.
OOTB supports creative teams with classification and compliance by:
Conducting detailed worker and role assessments to recommend appropriate classification determinations.
Managing independent contractor agreements that meet Freelance Worker Protection Act standards.
Verifying that independent contractors carry the appropriate insurance coverage.
Offering an integrated payroll system to onboard workers who are classified as employees.
Operating as the Employer of Record and ensuring that meal penalties, overtime, and required breaks are accurately tracked and paid to maintain compliance with wage and hour laws.
Sources:
Assembly Bill 5 Text: California Legislative Information
https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB5
What is Misclassification?: California Department of Industrial Relations
https://www.dir.ca.gov/fraud_prevention/Misclassification.htm
Disclaimer:
The information provided on this page is for general informational purposes only and does not constitute legal advice.