No, misclassification of an independent contractor under California AB-5 and Labor Code § 226.8 is generally a civil violation, not a criminal one.
However, depending on the severity and whether the misclassification was part of a larger scheme to evade taxes or labor laws, certain aspects of it could lead to federal investigations.
Is Misclassification a Criminal Violation?
Civil Violation (Standard Misclassification)
- Violating California Labor Code § 226.8 is a civil offense, leading to fines, penalties, and restitution for unpaid wages, taxes, and benefits.
- Employers can be required to publicly admit wrongdoing and correct misclassification issues.
Potential Criminal Implications (If Fraud or Tax Evasion Is Involved)
- If the misclassification was done willfully to evade employment taxes (e.g., payroll taxes, unemployment insurance, workers’ compensation), it may trigger federal tax fraud investigations under the IRS and Department of Labor (DOL).
- Large-scale systemic misclassification (especially across multiple contractors) could lead to criminal fraud charges, but this is less common unless paired with wage theft, fraudulent tax filings, or labor law violations.
Can You Waive Your Right to Report Them to the Federal Government?
No, you cannot waive your right to report them to federal agencies like the IRS or DOL—nor can a private settlement legally prevent you from doing so.
Here’s why:
- Labor and Tax Laws Are Public Policy Issues
- Private agreements cannot override federal reporting requirements.
- Even if you sign a settlement waiving your right to report, the IRS or DOL can still investigate independently.
- Waivers of Federal Reporting Rights Are Unenforceable
- Any non-disclosure agreement (NDA) or settlement clause attempting to prevent reporting to government agencies is invalid and unenforceable under federal law.
- Courts have ruled that individuals cannot contract away their right to report illegal activities (e.g., tax evasion, labor law violations).
- However, You Can Agree Not to Pursue Private Legal Action
- While you cannot waive federal reporting rights, you can agree in a settlement to not personally file a lawsuit or seek damages beyond the settlement amount.
- This means that while the government may still investigate, you personally would not pursue further action beyond the agreed settlement.
