$10 Million Judgment Highlights Risks of Worker Misclassification

Regulators are intensifying audits of worker misclassification, elevating it from an administrative detail to a recurring financial risk. Case in point:

A recent $10 million California judgment shows how classification errors translate directly into penalties and unplanned costs.

State Enforcement Becomes a Financial Risk

In October, California’s attorney general announced a $10 million judgment against an in-home caregiving provider accused of misclassifying workers as independent contractors. The decision came just two weeks after New Jersey secured a $19 million settlement from Lyft over similar allegations involving more than 100,000 drivers.

For the caregiving company, state investigators found that workers were paid as little as $120 for 24-hour shifts – about $5 an hour – with no overtime or benefits. That pattern of underpayment triggered wage violations, penalties, and back interest that quickly escalated into a multimillion-dollar liability.

Across states, regulators are expanding investigative capacity and data-sharing to target worker misclassification. Industry experts note that settlement amounts have grown noticeably larger over the past two years as states coordinate enforcement with tax and labor agencies. The Economic Policy Institute’s January 2025 report estimates that misclassification costs employers millions in back taxes and benefit liabilities, while draining state revenues through lost payroll contributions.

The report also shows how this practice exposes employers to significant financial liabilities. For small to mid-sized companies, even a single audit can expose years of unpaid payroll taxes and benefit contributions, creating ripple effects through cash flow, forecasting, and investor reporting. The message is increasingly clear: State actions are no longer isolated compliance matters but developing into a cross-agency revenue enforcement strategy.

What the Case Signals for Finance Teams

Worker misclassification carries heavy cost exposure across payroll, taxes and compliance. Finance departments share accountability for ensuring accurate classification, since these errors can directly affect:

• Wage and tax liabilities – including unpaid payroll taxes, overtime and minimum wage adjustments.
• Benefit obligations – such as retroactive payments for health coverage, retirement plans and paid leave.
• Legal and compliance costs – from penalties and audit expenses to defense fees.
• Governance reputation – large settlements can raise red flags with investors and regulators.

California and several other states apply the ABC test, which presumes employee status unless the company proves the work is independent and outside its core operations.

In this case, state regulators said the company failed all three tests. It controlled scheduling, client access, pay rates, and performance expectations, leaving no question that the workers functioned as employees.

Preventing Worker Misclassification – A Finance Priority

For finance leaders, classification accuracy is a control measure tied directly to cost predictability and audit defense. Addressing it effectively means integrating oversight into financial operations, not just reacting to legal risk.

Finance teams can strengthen discipline in four key ways:

• Align accounting and HR data to identify discrepancies that may indicate worker misclassification or reporting errors.
• Conduct internal audits on contractor and employee classifications to catch issues before regulators do.
• Document managerial control, performance expectations, and contract terms to support defensible positions.
• Model potential reclassification costs within budgets and forecasts to prevent unexpected liabilities.

These steps transform routine compliance tasks into proactive, quantifiable risk management strategies that safeguard payroll accuracy and strengthen overall financial oversight.

Reclassifying Risk as Financial Exposure

Worker misclassification now appears in the same risk discussions as audit readiness, tax exposure, and reporting accuracy. Recent judgments show regulators treating these cases as part of a broader revenue enforcement effort rather than individual labor disputes.

Finance executives are already feeling the effects through expanded data-sharing between agencies, larger settlements, and closer examination of payroll records. Organizations that treat classification accuracy as a financial control stay ahead by maintaining documentation, reconciling data, and building defensible audit positions.

The issue has moved beyond HR compliance into core financial governance. Companies that manage worker classifications through consistent audits and cross-department reviews protect compliance integrity and long-term operating stability.