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.
- 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
Similar bills are being considered by state legislatures in California, Georgia, Connecticut, Indiana, Maryland, Kentucky, Missouri, New Jersey, Nebraska, New York, New Mexico, Ohio, Texas, Pennsylvania and Vermont. Check back frequently for the latest updates on those bills.
By contrast, New Jersey is currently considering a law that would allow employers to share an employee’s or former employee’s credit history, work evaluations and other information in the personnel file with prospective employers or government agencies.
In most of these states, the limits to an employer’s use of credit checks apply to all employment decisions. However, the Florida and Michigan bills would only restrict use of credit history in hiring. An employer could still use a credit report for employment decisions regarding current employees.
California courts continue to limit employers’ use of arbitration agreements. This time, the Fourth Appellate District Court has determined that the new limits on arbitration agreements with employees also apply to independent contractors.
A previous California Supreme Court ruling in Armendariz v. Foundation Health Psychcare established that an arbitration agreement with an employee is only enforceable if it is mutual and does not require employees to waive rights they have under state law. Previously, many employers believed waiver of rights was the main purpose of an arbitration agreement.
The Supreme Court ruled that the employer’s “take it or leave it” attitude toward the items in the arbitration agreement made it invalid. Employees must be permitted to negotiate items in the arbitration agreement individually, without it affecting the job offer.
In order to be enforceable, a California arbitration agreement must provide for :
· A neutral arbitrator (more…)
The California legislature is considering several bills that would impact employers, including a minimum wage increase and extension of family leave rights. Another bill would protect employees who smoke medical marijuana.
Minimum Wage Increase
The California Assembly is considering AB 10, a bill that would increase the state minimum wage from $8.00 to $8.50 per hour. Even more importantly, the bill includes a provision to increase the minimum wage each year based on inflation.
Currently at $8.00 per hour, the California minimum wage is tied with Massachusetts for the seventh highest in the nation, after Washington, Oregon, Connecticut, Illinois, Nevada and Vermont. About a dozen states have annual cost-of-living increases to the minimum wage, including Florida, Arizona and Colorado.
Expanded Family Leave
If passed, the expanded CFRA would permit employees to take time off to care for an adult son or daughter, a mother- or father-in-law, grandparent, sister or brother, grandson or granddaughter, or a domestic partner with a serious health condition.
During inclement weather, many offices and businesses will close early. While last week’s post examined payment when the business is closed or remains open all day, different rules apply when the employer opts to close the workplace early.
Many states have reporting pay laws that guarantee an employee payment for a minimum number of hours when the employee reports for a scheduled shift. In those states, even if the employee works only 5 minutes, or reports to work but does no work at all, the employee is entitled to a minimum payment.
There is no requirement for reporting pay under federal law. The federal FLSA or Fair Labor Standards Act requires only that employees be paid for time worked.
Laws vary from state to state, but many times reporting pay is not required if the employer made a good-faith effort to inform the employee in advance that the business would be closed or that the employee’s schedule has been changed. Many states also exempt employers from reporting time pay when a business is closed due to an act of God, as when a tornado or flood destroys the building.
According to SHRM, the Society for Human Resource Management, seven states plus the District of Columbia have reporting time pay laws that affect adults: California, Massachusetts, Connecticut, New Hampshire, New York, New Jersey and Rhode Island. Oregon has a reporting time pay that applies to minors only.
A brief summary of reporting time pay laws by state: (more…)