There has been a major change in California independent contractor misclassification law as the result of a recent decision by the California Supreme Court. The ramifications of the decision in this case will be challenging for many San Diego business owners and employers to accept and implement. The new laws resulting from this decision create immediate and substantial risk for those San Diego businesses which have independent contractors as part of their primary business strategy.
The two significant changes contained in this ruling are:
- The new legal presumption in California that all workers are employees
- The burden of proof falls on the employer to justify their independent contractors are not misclassified employees
The presumption that all workers are employees provides immeasurable power to the California Employment Development Department or EDD and the Franchise Tax Board or FTB in an investigation or audit. These agencies are aggressively seeking new sources of revenue for the State of California. This ruling will provide them with the opportunity to find a company’s 1099 workers and independent contractors are actually misclassified employees exposing businesses to draconian civil penalties (up to $25,000 per instance of misclassification) as well as up to 4 years of income and payroll taxes associated with each independent contractor in question. Existing cases have shown it easy for the EDD or FTB to issue a ruling regarding a misclassified employee making $35,000 a year which generates a liability of over $100,000 for these combined penalties and taxes per employee.
In order to substantiate the classification of an independent contractor, your business will have to prove:
“that the worker is free from control and direction over performance of the work both under the contract and in fact,” AND
“that the work provided is outside the usual course of the business for which the work is performed,” AND
“that the worker is customarily engaged in an independently established trade, occupation or business.”
This represents a major change in California independent contractor misclassification law and creates immediate and substantial risk and potential significant financial liability for San Diego businesses who have independent contractors. If your company has independent contractors or 1099 workers we invite you to immediately contact Allen Barron or call 866-631-3470 for a free consultation.