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
The California Division of Workers’ Comp also changed the regulation in the state dealing with how employees can get pharmaceutical and pharmacy services, and how much can be charged for these fees to the workers’ comp system. Talk to any employer or workers’ comp insurance company, and they will tell you that medications are becoming a bigger and bigger part of the overall costs of workers’ comp. Especially when it comes to pain medications, employees’ injury costs are getting higher and higher because of the medications that they take to help with the healing process.
The way the system worked before in California was that the maximum fee for pharmaceuticals and other pharmacy services after January 1, 2004, had been 100 percent of the reimbursement amount that was suggested in the Medi-Cal professional fee system. For any drug or pharmacy service that was not including in the Medi-Cal fee schedule, then the maximum amount that could be paid out was $7.25 for a professional fee for dispensing a drug or $8 if the patient in question is in a skilled nursing facility or in some other form of intermediate care center.
This maximum fee includes the costs of a single medical professional whose job it would be to dispense the drug to the particular patient. This new rule kicked into effect on March 1 of this year. And again, if you have any additional questions on how these new drug and medication services rules will affect your medical and workers’ comp benefits, then you should contact the Division of Workers’ Comp in the state of California.
The contact person for this particular law change is named Carrie Nevans, and she can be reached by phone at 510-286-7100 or online at the following Web Site: www.dir.ca.gov/dwc, at the main Division of Workers’ Comp site.
The Division of Workers’ Comp in the state of California has just issued some revisions to the regulations in the state that all employers should know about. The changes to the regulations include a change to the wording of how employers’ workers’ comp programs can be routinely investigated. The wording change is meant to better explain just what those investigations entail.
These investigations, according to the new wording, must include a review of a so called stratified sample, which means that the investigators can take a random selection of requests made for authorization just as long as at least half of those selected requests are actually negative authorizations, meaning that the authorization has been denied. Following this? Let me try to explain it a little more.
These word changes also make it so that the investigation conducted must be done within a year and a half of the past investigation, so that doesn’t give too much time for us employers in California to figure out this new rule change. But supposedly, the rule change also makes it so that the information requested during the investigation will be in a simplified form, so that your claims administrator or utilization review person will not be overwhelmed, I’m thinking the thinking is here.
The new rules will also lessen the penalties given to employers if you allow a non physician reviewer to approve a request for review but then fails to posses a written request for treatment authorization. These new rules went into effect on March 24 of this year, so if you don’t understand them after reading this, I would suggest contacting the Division of Workers’ Comp in Cali and getting further explanation from them. They can be reached by phone 510- 286-7100 or online at www.dir.ca.gov/dwc. Otherwise, write me with questions and perhaps I can track down the answers for you.
In California, they have something called the Permanent Disability Rating Schedule, and it requires that the state Workers’ Comp Division analyze data from January 1, 2005, to June 30, 2006, to come up with the affects of whether or not the new regulations in the state are changing the way that disability and return to work is done in the state of California.
The first step in this evaluation process is to determine whether or not the regulation sin the state of California are equating to wage loss in the state. This wage loss study involves looking at three years of data after an injury takes place. But all of this information is not available, considering that the time span that the government officials are looking is about 18 months, or a year and a half.
So instead of doing a wage loss study, the folks at the California Division of Workers’ Comp are looking at the return to work rates in the state, as we mentioned earlier. Return to work rates are important and critical to understand how a disability system is working because any worker who goes back to work at t he same place that they got injured at actually might compensate for any wages they may have lost because of their injury. In other words, if there is a high return to work ratio in a state or a given company, then there tends to be less wage losses, if any wage losses at all.
Speaking of return to work, the reforms that California set through in 2004 give incentives to employers to get their injured workers back to work, no matter whether or not they are doing their original job or not. The key is to just get your employee back in the door, get them active and productive, and take care of them and their injury at the same time.
It’s great news that the Division of Workers’ Compensation has for employers regarding the return to work rate of employees in the state for the last few years. That is why they want to get this news out, and are willing to hold two public forums to make sure that employers get the word. The forums will also include question and answer forums so that employers in the state are clear as to what is happening there.
According to a study done by the Division of Workers’ Comp in California, there has been more than a 5 percent average increase rate for return to work rates for workers in the state who had been injured between the dates of January 1, 2005, and June 30, 2005, compared with what the rates were before January 1, 2005.
Anyone interested in attending one of these forums should come to hear the information on how the Division of Workers’ Comp came up with these figures, why they think these figure are accurate, what these figures represent, and how they can participate in making these numbers even more positive.
The first of the sessions actually took place this past Thursday, Feb. 15, so sorry about the late reporting on that one. I have been so caught up in the minimum wage thing that I have forgotten about other important issues that employers face, such as workers’ comp, disability, and return to work issues. There is a second session, though, in Northern California for those who can make it. It is set to occur in San Francisco, on Tuesday, Feb. 20. 2007. It will take place from 1 pm to 5 pm at the Milton Marks Conference Center auditorium on 455 Golden Gate Avenue. You can attend the session to ask your questions, or post them online at the Web site of the Division of Workers’ Comp.