IRS, DOL and EDD Misclassification Audits
What is the legal difference between an independent contractor and an employee? Should you be classifying your workers as an independent contractor or employee? The rules have substantially changed over the past few years, and it is important for San Diego employers to come into compliance with the new standards of the Department of Labor (DOL), the Internal Revenue Service (IRS) and the California Employment Development Department or EDD.
The old standard was based in large part upon the control of the company providing work. If the company providing the work allowed the independent contractor to schedule their own work, and provide their own tools and technology most employers believed that was enough to justify an “independent contractor” relationship. The benefits were obvious: eliminate exposure to minimum wage and overtime, as well as matching payroll taxes and employee benefits.
What has Changed the Definition of an Independent Contractor or Employee?
A recent case in the United States Supreme Court has emboldened agencies such as the DOL and IRS, and California agencies such as the EDD to attack this issue in an effort to increase tax revenues, as well as civil penalties and interest. In effect, the Supreme Court ruled that it was more about the “economic relationship” between the parties, as well as the duration of the work relationship.
The DOL has since published guidelines, and hired more than 100 auditors for the sole purpose of conducting independent contractor audits. The Supreme Court ruled there was no “single test” for an independent contractor or employee relationship. However the DOL has listed several “factors” in determining the misclassification of independent contractors including, but not limited to:
- The percentage of the total income of the independent contractor that comes from a single company – If your company is responsible for more than 60% to 70% of a single independent contractor’s wages it may be an issue.
- The “extent to which work performed is integral” to the provider’s business – If the work performed is integral to the provider’s business, it is more likely that the independent contractor is in fact an employee, and less likely that the independent contractor owns and operates a separate business from the provider of the work.
- The Nature of the Independent Contractor’s Business Entity – is there a formal business entity, and how much did the Independent Contractor invest in the formation and development of that entity. Was it simply established to cover the relationship in question? Did the company providing work invest in that company? Can the independent contractor affect the profitability of the work performed or the pricing?
- Professional Licensing / Difficulty of Work – Is the work performed by the independent contractor difficult in nature requiring specialized training or skills? Is a professional decree required to do the work? The less difficult the work, the more likely a finding of “employee” instead of independent contractor.
- The Permanency of the Relationship – The longer the relationship exists between the independent contractor and the work provider, the more likely a finding of misclassification becomes.
Contact Experienced San Diego Attorneys Who Defend IRS, DOL and EDD Misclassification Audits
Are you concerned about the nature of employment in your business, and the potential for misclassification of employees as independent contractors? Have you been contacted for an IRS Audit, DOL investigation or by the EDD for a “status audit”? We invite you to contact us, or call 866-631-3470 for a free and substantive consultation. Learn about the protections of the attorney-client privilege and how this protects the information you share and our ability to counsel and protect you.