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 “Independent Contractor” as given by the 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 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.

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/



No Comments >> Posted in California,California,California,California,Compensation,Compliance Issues,Employee Benefits,Employment Laws,Insurance Benefits,Labor and Employment,Unemployment Insurance,Worker's Compensation
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Rhode Island Governor Repeals E-Verify

January 26th, 2011 Posted by Amelia

State contractors in are no longer required to use E-Verify under an signed by new governor Lincoln Chafee on his first day in office.

 

Chaffee, an Independent, said, “This repeal of all parts of the Executive Order on will effectively turn the clock back to March 26, 2008, the day before then-Governor Carcieri signed it into law.” Governor Chafee added, “This re-set will allow us to engage in a comprehensive dialogue with our immigrant communities, law enforcement agencies and all interested parties. This is an opportunity to reach a consensus on how best to enforce the law.”

 

The new executive order means that companies holding contracts with the state of Rhode Island are no longer required to use E-Verify when new employees. It is still lawful for the companies to use E-Verify, but they are not required to do so.

 

Branches of the state government are not required to use E-Verify for newly hired employees under the new executive order, and there is every indication that they will stop doing so.

 

In March 2008, Republican Governor Donald Carcieri issued an executive order that required all state agencies in the executive branch, and state contractors, to use E-Verify to ensure that they were not hiring undocumented workers.

 

This action is in contrast to a trend among states to more strongly enforce laws during a recession with high unemployment. In Florida, for example, the newly elected governor (more…)

No Comments >> Posted in Employment Laws,Labor and Employment,Rhode Island
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Limits on Audits of Federal Contractors by OFCCP

August 11th, 2010 Posted by Amelia

In a move that is good news for contractors, a has decided that audits by the OFCCP or Office of Federal Programs are limited in scope.

 

In a landmark case involving the Frito-Lay plant in , Texas, the judge ruled that the could not continue asking for more and more information to . Instead, the original scheduling letter set on the documents the government agency was allowed access to. Frito-Lay is the corporation headquartered in Dallas that produces potato chips, corn chips and other snack foods. They provide 59% of nationwide sales of snack chips.  

 

Initially, in July 2007, the OFCCP requested applications, affirmative action plans and other documents related to at the Dallas plant for 2006 through June 2007. According to OFCCP, those documents showed a pattern of adverse impact (more…)

No Comments >> Posted in Federal Labor Laws,Judicial Decisions
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NLRA Poster Required

July 16th, 2010 Posted by Madison

Every must display a informing employees of their rights under the National Labor Relations Act or . Under a directive recently issued by the U.S. Department of Labor, merely posting the notice electronically is not sufficient. The poster must also be posted in conspicuous locations in the workplace.

 

Inspectors will check for the NLRA posters as a routine part of the on-site inspection in awarding contracts. Prominently displaying the poster puts the employer in with 13496.

 

An employer who posts notices electronically must include the NLRA information. However, the employer must also display posters in the worksite, in addition to the online information.

 

The NLRA poster informs employees of their legal rights to join a union, form a union or assist a union. In addition, the poster informs employees that they have the right to enter into agreements with the employer. It includes examples of legal and illegal contracts. The poster also includes information on how an employee may contact the National Labor Relations Board or with complaints and questions. Posters are available at www.laborlawcenter.com.

 

Under EO 13496, the poster must also be supplied in a language (more…)

No Comments >> Posted in Compliance Issues
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E-Verify for Federal Contractors

January 6th, 2009 Posted by Amelia

Beginning January 14, 2009, a new rule requires to use an electronic system like to check the status and eligibility of every new , and old employees on certain sensitive projects.

 

A suit filed by SHRM, the Society for Human Resource Management, seeks to overturn that law. SHRM has filed a federal suit with four other employer organizations to block the rule. In addition to SHRM, the December 23, 2008 suit was filed on behalf of the U.S. Chamber of Commerce, Associated Builders and Contractors, American Council on International Personnel and the HR Policy Association.

 

SHRM has asked the Bush administration to withdraw the proposed rule from consideration. The administration has declined, however, and employers should continue to use E-verify to comply with the law.

 

Under an from President Bush, federal contractors and subcontractors (more…)

No Comments >> Posted in Federal Labor Laws,Migrant Worker Protection,Regulations
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