New Rules for Independent Contractor Classification

You may have heard a lot about the new rules for independent contractor classification and the controversy surrounding the question of “1099 or employee?”  Why should you pay attention if you have independent contractors?

The truth of the matter is it is good business to hire independent contractors when possible as it reduces overhead and provides needed resources to accomplish specific tasks.  If your goal is simply to attempt to classify what should be an employee as a 1099 worker or independent contractor new rules out of the US Supreme Court will take a big bite out of your strategy.

The classification of an independent contractor used to be based on issues of “control” such as the provision of tools or equipment, scheduling of appointments, establishment of hours.  The standard is now based upon two standards: the financial relationship between the parties, and the duration of the work to be provided.  How much of your independent contractor’s income is derived from your company?  If the answer is more than 60% you will probably face an IRS or EDD hearing or audit.   The federal or California agency will look at the nature of the business entity of your independent contractor and will request all invoices.  If payment is regular and in the same pattern as your company’s payroll system it will be a huge red flag.  If the independent contractor is not invoicing you for payment, prepare to have them reclassified as an employee.

The level of work performed by an independent contractor must “require specialized training, certification, education or licensing,” and cannot be common work that virtually any of your employees could do.  The investigating agency will look at the actual work being performed by the independent contractor and the duration of your relationship.

The reclassification of an independent contractor as an employee can be a substantial financial event.  Many companies have gone out of business as a result of independent contractor reclassification.  The penalties and associated back payroll costs (3 years or more) can be several multiples of their annual salary.  Come into compliance with the new rules for independent contractor classification and avoid misclassification audits and penalties.  We invite you to contact the employer defense Lawyer for Employers for a free consultation at 619-996-9960.