Many California and San Diego business owners are rightfully concerned about the question of 1099 workers or employees as they plan new business strategies for growth in 2018. While momentum at the federal level has stalled, the question of independent contractor or employee has never presented greater challenges. The State of California and the Employment Development Department or EDD in particular are challenging all 1099 workers and the nature of their employment relationship with the provider of work. Why should a business owner be concerned? When the EDD, California Department of Labor or the IRS assert 1099 workers are misclassified “employees” the liabilities and costs to the employer quickly reaches six figures for each employee.
Misclassification of employees as independent contractors is a violation of a civil code carrying a penalty of $25,00o per occurrence. The employer must then pay all back federal, state and local employer matching taxes including unemployment, workers compensation and social security taxes, as well as reimbursement to the “employee” for unprovided benefits, healthcare, vacation and even unpaid overtime. What has changed? Primarily it is the nature of the financial relationship between the 1099 worker and the work provider. If the 1099 worker earns more than 60% of their income from your business you may be at serious risk. The IRS, EDD and the California Department of Labor look at the entity of the 1099 worker (yes, they should have their own entity) and the process by which they are paid for their work. Does the 1099 worker have any influence over the costs and profitability associated with their work, or is this dictated by you as the work provider?
Other historical issues of control such as the provision of tools or training, scheduling and other constraints still apply. The question of whether to structure this portion of your work force as 1099 workers or employees for San Diego business owners is a crucial issue. We invite you to contact the San Diego employer defense and general business counsel attorneys at the Watkins Firm or call 858-535-1511 for a free consultation.