Hiring Independent Contractors is a legitimate business model in all states, and true Independent Contractors should receive 1099s for compensation for their services. However, many employers give 1099 forms to people who are misclassified as Independent Contractors when they should have been paid as employees.
Sometimes the employer’s motive is honest – they believe that the worker is truly an Independent Contractor; but more commonly, they pay with a 1099 to keep the overhead cost down and not give the employee the true protection they need for their work.
The basic definition of the “Employee” and the “Independent Contractor” as given by the Employment Development Department (EDD) of California is as follows:
- Employee: An individual who performs services for you and is subject to your control regarding what will be done and how it will be done.
- Independent Contractor: An individual who performs services for you, but you control only the result of the work.
The employer must understand these definitions in order to remain in compliance and not be issued all the fines and penalties.
The IRS, Department of Labor, and many state agencies are taking aim at businesses using Independent Contractors due to the suffering tax revenues everywhere. Paying Independent Contractors with a 1099 eliminates wage withholding, employment taxes, unemployment taxes, worker’s compensation, and offers no pensions and fringe benefits to the worker. The employer may be benefitting now, but the ramifications can be outstanding.
If found guilty of misclassifying workers, the employer will be faced with costly audits by the IRS, EDD, and Department of Industrial Relations, additional taxes, penalties, and interest, plus revocation of state/local license.
The state of California passed a Labor Law in October 2011 designed to crack down on the misclassification of workers as Independent Contractors and dramatically increased the penalties on employers who have been found to have willfully done so. The SB 459 added the following fines:
- California’s Labor and Workforce Development Agency can fine you for “willfully misclassifying” an employee from $5,000 to $15,000 per violation.
- The penalty goes up to $25,000 per violation if you commit a “pattern and practice” of “willfully misclassifying” workers.
- There’s joint and several liability for consultants (but excluding practicing lawyers) who advise employers on such independent contractor engagements.
- It’s unlawful to charge misclassified independent contractors any fee or take deductions from the compensation paid to them. Companies cannot deduct fees for goods, materials, space rental, services, government licenses, repairs, etc. provided to contractors who are reclassified.
Paying a true employee with a 1099 and misclassifying them as Independent Contractor may lower the overhead costs now, but should the relationship be terminated, or competitors start to ask questions – both may contact the EDD or the IRS, and the truth will be revealed. The employer will be left having to pay an enormous amount of taxes, fines, and penalties.
The cost is not worth the risk. Be informed of the regulations and the law. Be in compliance at all times for your business.
DE 231, Information Sheet – Employment
DE 231EEE, Information Sheet – Exempt Employment
DE 38, Employment Determination Guide
DE 1870, Determination of Employment Work Status
Employment Status Course
Employee or Independent Contractor Tax Seminar
A number of states require the employer to give employees unpaid time off to attend school events such as parent-teacher conferences and classroom events. This includes California, Colorado, Illinois, Massachusetts, Minnesota, Nevada, North Carolina, Rhode Island and Vermont — all have school visitation laws.
The Colorado Academic Activities Leave Law applies to employers with 50 or more workers. It permits the parent or guardian of a K-12 student to take off 6 hours per month in increments of up to 3 hours each, up to a total of 18 hours per academic year. Paid leave may be substituted for the unpaid school visitation leave, but the law does not apply to supervisory employees.
Illinois provides for parents and guardians to take up to 8 hours of unpaid leave
The California Supreme Court recently ruled that employees are not entitled to unlimited time off to care for family members who are ill.
Under the California Kin Care law implemented in 1999, employers that offer accrued sick leave to workers must allow employees to use up to half their annual total to care for a spouse, child, parent or domestic partner who is ill.
Then as now, there is no requirement under the law that any California employer must provide sick leave to employees. However, for employers who choose to offer this benefit, the law addresses how it may be used.
In a rare unanimous ruling, the court found that the California Kin Care law applies only when a company awards a specific amount of sick leave, and that sick leave can be accrued.
The trend among some larger companies is to offer employees unlimited sick leave, especially under certain collective bargaining agreements.
Applauding the victory for California employers, attorney Anthony Oncidi noted that the law was a “perfect example” of a well-meaning law that resulted in abuse by employees. He noted that many California companies had actually reduced or eliminated sick leave policies, due to the previous restrictions.
In the test case involving telephone company AT&T, Inc., the employer provided up to 5 days of paid sick leave for a legitimate illness in any 7-day period. The sick leave period reset each time the employee returned to work, under a collective bargaining agreement. (more…)
The dilemma is that the CFRA specifically adopted the 1995 FMLA regulations – the “old” regulations, to many employers. Meanwhile, the new FMLA regulations apply to many of the same employers.
There are several conflicts between the two sets of regulations. For example, the 2009 FMLA regulations give employers the right to require that an employee produce a fitness-for-duty certificate every 30 days when there are reasonable concerns about the employee’s physical safety due to a serious health condition, and the employee is using FMLA intermittently.
The California regulations do not permit this.
When both federal and state law apply, the employee is entitled to coverage under whichever law provides the greater benefit – to the employee. (more…)
The U.S. Department of Labor recently announced two actions to recover benefits for workers in Mississippi and California, under federal law.
Most employees never think twice about employee benefit plans, but they should. In 2006, the U.S. Department of Labor recovered more than $2.6 billion in employee benefit funds that had been misappropriated by employers. These included funds for employee pension plans, healthcare funds and profit-sharing accounts.
In the most recent case, the DOL recovered $3.5 million in five union employee pension funds that had been misappropriated by the plan trustees. The retirement, health, scholarship, apprenticeship, and vacation and holiday funds cover more than 2,000 participants employed throughout northern California.
The settlement also orders the sale of the Konocti Harbor Resort and Spa on Clear Lake. The Kelseyville, California resort hotel was apparently renovated and operated with funds diverted from the union pension plans. The DOL charges that the union “imprudently spent millions” to build and maintain facilities at Konocti, despite the resort’s continued losses. In addition, the union profited from the interest of a $6 million loan that it made to itself.
“Workers’ retirement dreams, health and other benefits were jeopardized by the gross mismanagement of their benefit plans,” said Secretary of Labor Elaine L. Chao. “This legal action puts the benefit plans under new, independent management and restores at least $3.5 million to the pension plan.”
The plan administrators were removed from five employee benefit plans sponsored by Local 38 of the United Association of Plumbers, Pipefitters and Journeymen of San Francisco. The trustees were permanently barred from serving as fiduciaries or service providers on any employee benefit account, ever again.
The suit filed by the DOL alleges violations of the Employee Retirement Income Security Act (ERISA) by current and former trustees. The trustees include Lawrence J. Mazzola, Sr., the business manager and financial secretary-treasurer of Local 38. Other trustees who were removed include, William Fazande, Larry Lee, James Shugrue, Bohon Kazarian, Tom Irvine, Robert E. Buckley, Art Rud, Ron Fahy, and Robert Nurisso. Frank Sullivan, plan administrator, was also banned for life from controlling any more employee benefit accounts.
In a surprise move, the court retained Lawrence J. Mazzola Jr. and Robert E. Buckley Jr., two trustees who have been on the board for less time.
Under the settlement, a court-appointed independent administrator will oversee the union employee benefit plans and implement financial controls to prevent future misuse of the assets. A second court-appointed trustee has independent and exclusive authority over the resort sale and, until it is sold, management and operation of the property.
In the future, all assets of the pension plan must be managed by professional investment managers under the oversight of an investment monitor.
In a second case, the DOL obtained a settlement requiring the Mississippi State Medical Association, or MSMA of Ridgeland, Mississippi, to reimburse participants and beneficiaries for unpaid health claims. The claims resulted from the termination of the MSMA Benefit Plan and Trust.
Ironically, MSMA was established in the 1980s to provide healthcare for physicians, their employees and families. Prior to its collapse in January 2004, the plan had more than 1,800 participants.
“The mismanagement of this benefits plan left workers and their families on the hook for unpaid medical bills,” said U.S. Secretary of Labor Elaine L. Chao. “The department’s legal action will ensure that the plan sponsor meets its responsibility by paying the medical bills of these workers and their families.”
The judgment appoints Receivership Management Inc. as an independent fiduciary to manage the distribution of plan assets. The judgment also removes MSMA as a fiduciary to the health plan and protects participants from creditors’ claims by medical providers. Finally, MSMA is enjoined from providing health, disability or other welfare benefits through any self-funded arrangement in the future and may be liable for a civil penalty.
The Labor Department’s lawsuit alleged that MSMA knew the plan was under funded, did not take steps to remedy the situation and failed to inform participants of the unsound financial condition. As a result, the plan had more than $5 million in outstanding claims when it was terminated.