If you are a San Diego employer with 1099 independent contractors you can expect a series of audits. It may begin with the standard California EDD audit on a cycle of every 3 years, it could be a California Labor Board or US Department of Labor audit, or it could be an IRS audit. All of these federal and state agencies are targeting any San Diego employer with 1099 independent contractors who could be considered as “misclassified employees.”
“How can they do that?” This is the common question asked by many local area employers facing questions during recent audits. One example was a client in the entertainment business who had several independent contractors who worked on short-term projects. This employer used the same contractors over and over, but they also did work on outside projects. The EDD has asserted that the workers are actually employees because they earn the majority of their income from work sourced through his company, and he exerts a high degree of control over the work performed. This example is not unusual.
The State of California is desperately seeking new sources of tax revenue. A recent California Supreme Court ruling brought a major change to employment in our State: Workers are presumed to be employees. The burden to prove otherwise lies with the employer. The same ruling has provided an A-B-C test. The 1099 independent contract must have their own company, be in control of their own fate from a profit and loss perspective, and must not earn more than 60% of their income from any single source. They should also not be working on anything which associated with your central business. For example, a shoe manufacturer could have a 1099 electrician, but not a 1099 shoe assembler.
If your 1099 workers are dedicated to working on your central business activities the EDD, IRS, Labor Board and DOL will not be flexible. The price for misclassification is extremely harsh. The civil fine in California for misclassification is up to $25,000 per employee, as well as back payment of all payroll taxes, unemployment, workers compensation, social security (FICA) and the value of any benefits offered to your own employees such as healthcare and 401(k) matching. In addition, the EDD and DOL are helping those same employees to assert unpaid overtime and other labor violations. Recent cases have resulted in awards exceeding $200,000 per employee.
If you are a San Diego employer with 1099 independent contractors it is time to take a hard look at how you do business. Once an audit is started we will aggressively defend you, however it is important to get ahead of the issue and structure relationships and transactions so that it makes it much for difficult for a state or federal agency to assert misclassification. We invite you to contact Allen Barron or call 866-631-3470 today to schedule a free consultation.
