Independent Contractor Misclassification Audits in California Continue to Rise

Independent contractor misclassification audits in California continue to rise.  The IRS as well as the California Employment Development Department or EDD are heavily targeting San Diego employers with 1099 employees or independent contractors.  Each agency believes the vast majority of independent contractors are actually employees who are misclassified.  The financial impact of this issue is substantial for all employers, and can threaten the actual survival of most businesses.

The issues arose out of a US Supreme Court decision 18 months ago.  The Supreme Court ruled that it wasn’t simply a matter of control, or the provision of appointments or tools.  The relationship between a company and it’s independent contractors is more closely tied to economics.  Basically, how much of the income of your independent contractor(s) is earned from your company?  If an independent contractor or 1099 worker earns more than 60% of their income from a single company, the IRS and California EDD are more than likely to re-classify that worker as an employee.

This opens the door for an immediate civil penalty which can amount to $25,000 per employee, as well as all back payroll related taxes, unemployment, and workers’ compensation.  In addition, the newly classified employee will seek reimbursement for benefits and unpaid overtime that “should” have been paid under terms of employment with a normal “employee” but was denied to the 1099 worker or independent contractor.

A small trucking company with 18 drivers was recently ordered to pay each in excess of $200,000 due to misclassification as independent contractors.  That company has filed for business and ceased to exist.  There are many similar stories throughout San Diego.

If you have 1099 workers or independent contractors we invite you to contact us for a free consultation at 619-996-9960.  Learn how to protect yourself from allegations of misclassification and the steps you may need to take to come into compliance with federal and California law.  Independent contractor misclassification audits in California are on the rise.  Your company’s future may be at risk.