Unintentionally (or Intentionally) Misclassifying Independent Contractors is Too Risky

March 28th, 2012 Posted by admin

Independent Contractors is a legitimate 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 ; but more commonly, they pay with a 1099 to keep the overhead cost down and not give the the true protection they need for their work.

The basic definition of the “Employee” and the “” as given by the Employment Development Department (EDD) of 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 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.

Resources:

Forms:

DE 231, Information Sheet – Employment

DE 231EEE, Information Sheet – Exempt Employment

DE 38, Employment Determination Guide

DE 1870, Determination of Employment Work Status

Additional Resources:

Employment Status Course

www.edd.ca.gov/Payroll_Taxes/Web_Based_Seminars.htm

Employee or Independent Contractor Tax Seminar

www.edd.ca.gov/Payroll_Tax_Serminars/



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18 States Consider Limits on Use of Credit Reports in Screening

March 30th, 2011 Posted by Amelia

, and recently joined 15 states that are considering limits to employers’ use of credit reports in hiring and other .

 

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 that would allow employers to share an ’s or former ’s credit history, work evaluations and other information in the personnel file with prospective employers or government agencies.

 

In the last three years Washington, Hawaii, and Illinois have passed laws limiting the use of credit reports in hiring. A similar bill failed to pass in Colorado.

 

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 for employment decisions regarding current employees.

 

In Florida, Senate Bill 1562 would make use of credit scores an “improper employment practice” unless (more…)

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California Arbitration Update

March 25th, 2011 Posted by Jolie

courts continue to limit employers’ use of agreements. This time, the Fourth Appellate District Court has determined that the new limits on agreements with employees also apply to independent contractors.

 

A previous California ruling in  Armendariz v. Foundation Health Psychcare established that an arbitration with an is only enforceable if it is mutual and does not require employees to waive rights they have under state . 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…)

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California May Expand Employee Rights

March 18th, 2011 Posted by Amelia

The California legislature is considering several bills that would impact employers, including a and extension of family leave rights. Another bill would protect employees who smoke medical marijuana.

 

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 for the seventh highest in the nation, after Washington, , , Illinois, Nevada and Vermont. About a dozen states have annual cost-of-living increases to the minimum wage, including , Arizona and Colorado.  

 

Expanded Family Leave

A bill before the Assembly would expand the California Family Rights Act or CFRA to allow employees to take unpaid, job-protected leave in many more situations.

 

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-, grandparent, sister or brother, grandson or granddaughter, or a domestic partner with a serious health condition.

 

The federal was modeled after the CFRA, one of four current California family rights laws. Currently both and CFRA permit an to take time off to (more…)

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Reporting Time Pay Varies By State

February 18th, 2011 Posted by Amelia

During inclement weather, many offices and businesses will close early. While last week’s post examined payment when the 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 . 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 . 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 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, , , , , and Rhode Island. has a reporting time pay that applies to minors only.

 

A brief summary of reporting time pay laws by state: (more…)

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