There has been an historic change in how employees or independent contractors are classified, especially here in California. California employers with 1099 workers face audits from every direction. The US Department of Labor (DOL) recently added 700 auditors who will be entirely focused upon auditing businesses in search of misclassified independent contractors. The IRS has taken a keen interest in 1099 workers as well. Here in California, an employer with 1099 independent contractors faces audits from the Franchise Tax Board (FTB), The Employment Development Department (EDD) as well as the office of the Labor Commissioner / California Labor Board. What is the future for independent contractors in California and how can you be certain your workers are not misclassified?
The root of recent change is a US Supreme Court decision a few years back that recognized the economic relationship between the parties as the key element, versus the “control” aspects of the previous rule of thumb. Today, federal and California state audits look at the percentage of income the independent contractor obtains from a single source. If they make more than 60% of their income from a single source they are more likely to be an employee. Does the independent contract own their own company and is there a legitimate corporate entity? Does the independent contractor issue an invoice for work performed instead of receiving a check from the employer’s payroll system? Can the independent contractor make their own decisions about how the work is performed and what resources will be allocated in a way that affects genuine profit or loss? If the payment is fixed, and based on hourly work the agencies will almost always find in favor of misclassification.
So what? How does this change the future for independent contractors in California employer strategies? What happens if your independent contractors are misclassified? How about a civil penalty of $25,000 per employee and the requirement to pay back wages including overtime for 3 years look back? In addition, you will be required to reimburse for many expenses including healthcare, 401(k) and other benefits offered to your employees. In addition you will be required to pay all back taxes including employer matching. The cost per employee is staggering. Recently, an LA trucking company with 38 drivers was ordered to pay more than $200,000 to each driver – a finding that bankrupted the business.
The future for independent contractors in California is constricting, as more and more will be classified as employees going forward. Allen Barron is uniquely positioned to advise you regarding the proper classification of workers and to represent you in a California, federal or IRS audit or in hearings before State and Federal agencies. Call us at 866-631-3470 for a free consultation and protect yourself from an expensive and potentially business-ending audit.