Misclassification of Independent Contractors

One of the most controversial issues many San Diego employers face is allegations of the misclassification of independent contractors by workers, state agencies such as the Employment Development Department or EDD, the California Labor Commissioner and federal agencies including the IRS.  One of the primary issues which arise during an IRS audit or a California tax audit are questions regarding the misclassification of independent contractors which the agencies believe should be “employees.”  While the present administration has relaxed this avenue for the time being at the US Department of Labor, the IRS and California state agencies continue to pursue independent contractor misclassification aggressively.

How Will I Come to Their Attention?

1099 workers and independent contractors become suspect of misclassification in many ways but the 3 primary methods are:

  1. Complaint by the independent contractor to a state or federal labor agency regarding benefits or overtime
  2. EDD audit – every 3 years the EDD audits most companies with workers;  First question they will ask is “Tell us about any 1099 workers you have.”
  3. IRS audit – the IRS is constantly searching for new revenues and it is easy for them to target 1099 workers through their internal systems

It may not be a question of “if” but more a question of “when” that knock will come at your door.

What is the Cost of Misclassification of Independent Contractors?

The California civil penalty for misclassification is up to $25,000 per “employee” along with back pay, overtime, compensation for non-provided benefits as well as all payroll related taxes, unemployment and workers compensation.  The reality for most businesses is over six figures per employee, in many cases representing the end of the company.

What Can Allen Barron Do to Protect Me?

The best defense is a good offense.  We help clients to come into compliance with the “tests” employed by the EDD to determine the question of “employee” or “independent contractor.”  We help to structure the agreements and policies which ensure the necessary separation between your company and your independent contractors.  Once a complaint or lawsuit is filed we aggressively represent businesses in misclassification hearings, audits and lawsuits.  We present documentation and argue the law and remind them of the limitations of that law.  For example, one of our clients ran a part-time company which hired independent for individual projects which lasted a week or two.  Each independent contractor had a unique skill, and contributed their skills to the project.  There were substantial time gaps between projects, but contractors provided similar work on many separate projects over time.  The EDD and the IRS attempted to argue the independent contractors were actually employees, even though there were often weeks between engagements and some were more complex than others.  Allen Barron’s attorneys, tax and accounting professionals fought the battle from a tax perspective, an accounting perspective and a legal perspective, ultimately triumphing after a long drawn out process.

Contact San Diego Independent Contractor Misclassification Defense Attorneys

Are you concerned about the nature of the workers you have presently classified as independent contractors?  Are you facing accusations of misclassification of independent contractors by the IRS, EDD or another state or federal agency?  Are you facing a lawsuit from present or former contractors alleging employment violations?  We invite you to contact the experienced commercial and business litigation attorneys at Allen Barron or call 866-631-3470 for a free consultation.  Learn how Allen Barron can provide insight, answer your questions and help build a strategy to prevent issues with misclassification in the future or defend you in a misclassification lawsuit, hearing or audit.