Misclassification of Independent Contractor or Employee

Employee Misclassification a Growing Challenge for San Diego Employers

The misclassification of employees as independent contractors has become a significant area of focus for the US Department of Labor, the IRS and California’s state agencies.  The Department of Labor recently hired 700 new auditors whose sole focus will be employee misclassification audits.  Your business model may be built upon the use of independent contractors, or you may simply use a few to manage various aspects of your business.  If you employee independent contractors in San Diego you need to understand a major change in the law has occurred.  It has exposed you to significant civil penalties, and an audit that would expose you to tens of thousands of dollars in penalties, back payroll taxes and benefits.

The principle issue is the relationship between your company and the independent contractors.  Lets begin with the financial relationship – if your independent contractors earn more than 60% of their revenue from your company alone you are a candidate for employee misclassification.  If that number reaches 70% or above you should give serious consideration to the nature of the relationship.  Your independent contractors need to have their own company.  The auditing agency will also ask you and the independent contractor (IC) about the nature of the IC’s company.  Who put up the investment to start that company?  Who provided the seed money?  Did the formation of that company coincide with the IC’s start of work for your company?

Other issues will focus on the nature of the work itself.  Generally speaking, if you need professional licensing or a graduate degree in order to accomplish the IC’s work there should be no issue.  New IRS and State of California guidelines establish rules regarding the difficulty of the work to be performed by an independent contractor.  If anyone in your company can perform the work, you are going to be a target for employee misclassification of the independent contractor.

The federal government and the State of California are searching for new sources of revenue.  If your independent contractor is declared an employee you will face a substantial civil penalty to the State of California (up to $25,000 per employee), as well as back payroll taxes, unemployment, workers compensation, FICA, and all benefits such as healthcare and even 401k contributions.  The next lawsuit you will face is an unpaid overtime lawsuit filed by the independent contractor for all the overtime they worked while they served as an independent contractor.

The costs are too high.  The risk is genuine and growing.  If you employ independent contractors or are concerned about em invite you to contact us for a free consultation at 619-996-9960.