Independent Contractor and Employee Misclassification Issues in San Diego
The penalties for independent contractor and employee misclassification are not only extremely expensive, they can threaten the very survival of your company. Significant changes in federal, state and local employment laws have changed the nature of independent contract relationships, as well as the thresholds associated with exempt and non-exempt employees for the purposes of overtime pay.
Changes in the law relating to the classification of an independent contractor relationship go back to a recent decision by the United States Supreme Court. In its landmark decision, the court modified the principle concepts associated with the relationship between an employer and an independent contractor. The “old” method of classification was largely based upon control over the independent contractor’s schedule and work, as well as the provision of tools and technology.
Today, federal and California tax and labor agencies are looking at the financial connection between the parties, in addition to classic issues of control and the provision of tools and technology. The San Diego “Lawyer for Employers” team will protect you from exposure to the serious financial implications of employee misclassification, and represent you in all cases involving allegations of misclassification.
The Financial Relationship Between an Employer and an Independent Contractor
The Supreme Court noted that it was the nature of the financial relationship between the parties that was the central factor. If an independent contractor earns more than 60% of their wages from a single source, the company providing the work may not be able to classify the relationship as an independent contractor. The Court also pointed to the nature of the business entity of the independent contractor. Is there a separate LLC or corporation? Did the independent contractor create the entity or did the company providing the work (the employer) assist with its creation? What was the source of investment in this entity? This is an area federal and state agencies are focusing upon. It provides the greatest opportunity for independent contractor and employee misclassification audits and penalties.
Length of Relationship and Difficulty of Work
The ruling also extended to the duration of the relationship and the type of work performed under an independent contractor relationship. When a relationship exists with an independent contractor for more than a year, serious questions must be asked (by federal and state officials) as to the permanency and therefore actual relationship between the employer and the independent contractor.
The difficulty of the actual work performed is another new component of evaluating and independent contractor relationship. In order to qualify, the work performed by independent contractors must require special skills, education, knowledge, licensure or certification. If the work can be performed by almost any employee-level associate of the company the relationship cannot be considered to be an independent contractor.
While there may be exceptions, the “Lawyer for Employers” team will help you to understand your risks, the new standards, and evaluate existing relationships with independent contractors.
Penalties for Employee Misclassification
The penalties for independent contractor and employee misclassification are quite harsh. The misclassification of an employee as an independent contractor in California carries a minimum civil penalty of $5,000 to $25,000 per incidence. Most penalties are closer to the maximum range in the calculation. In addition, the employer is required to pay all payroll taxes, unemployment, workers compensation and healthcare costs for a look-back period of 3 years as if the independent contractor had been a paid employee of your company.
However, it doesn’t stop there. The independent contractor themselves may file legal action against you claiming unpaid overtime, unpaid benefits and reimbursement for expenses based upon the plans you offer to like employees for the same 3 year period.
Contact an Experienced Lawyer for Employers to Prevent Employee Misclassification
California agencies and tax agents are starved for revenue. The IRS has a substantial interest in misclassification cases and this has become a highly audited area within the agency. The US Department of Labor recently hired 700 new auditors whose primary task will be to evaluate misclassification of employees, and specifically those who employ independent contractors.
The threat is genuine, and the financial risk can seriously damage or bring an end to your business. The San Diego Lawyers for Employers team will work with you to evaluate your potential exposure, and help to bring you into compliance with all federal, state and local employment law.
If you are a San Diego employer we invite you to contact us, or call (619) 996-9960 for a free consultation. We will provide cost-effective services to provide sound evaluation and risk reduction strategies relating to employee misclassification and the relationship between your company and independent contractors. Prevent independent contractor and employee misclassification and avoid harsh penalties. Learn about our decades of experience, and our track record of success defending employers in employment disputes and litigation.