How do independent contractor misclassification claims arise in San Diego? What is the cost to an employer who misclassifies employees as independent contractors? Usually, independent contractor misclassification claims come about by a complaint by the employee to a federal or California agency alleging compensation or employment issues or during an audit by the IRS, California Employment Development Department (EDD) or other California agency such as the Labor Commissioner’s Office. California agencies often refer to these types of cases as “wage theft” suggesting employers are using misclassification as a strategy to avoid providing specific rights or benefits which an employee would otherwise receive. This often includes medical benefits, unpaid overtime, vacation and sick leave, unemployment and workers compensation benefits.
Is a worker truly an employee or an independent contractor? How are independent contractor misclassification claims examined? The old test which was based upon the control of the “employer” or “provider of the work” has substantially evolved over the past several years. California agencies are looking at the financial relationship between the provider of the work and the independent contractor. The first consideration is usually based upon the percentage of the independent contractor’s income which comes from a single source. If your independent contractors earn more than 60% of their income from your company prepare for an intense EDD or labor agency audit.
The agency will investigate the nature of the entity the independent contractor is using. How was the company formed? Who paid for the entity to be created? Is the independent contractor able to decline specific work? Do they have the opportunity to establish pricing and to experience profit or loss based upon their own strategies? Are they billing your company for services or are they paid through the payroll process? Control is still a factor in this equation as well. The greater the degree of control over the worker, the more likely one is to be classified as an employee and not an independent contractor. Misclassification will result in civil penalties up to $25,000 per incident, as well as back pay and compensation for benefits, unpaid overtime, taxes as well as the payment of workers compensation and unemployment compensation premiums. This easily amounts to six figures for each misclassified employee.
Is your company at risk for independent contractor misclassification claims and resulting hearings and audits? Are 1099 workers and independent contractors part of your business strategy? Have you been contacted by a California agency or the IRS for an audit? We invite you to contact Allen Barron or call 866-631-3470 for a free consultation.