Are your employees misclassified as 1099 workers or independent contractors? San Diego employers should be aware that the Federal Department of Labor (DOL), the IRS as well as California’s Franchise Tax Board and Employment Development Department are auditing many local companies searching for employees misclassified as 1099 workers or independent contractors. The costs to employers who are found to be misclassifying employees is staggering.
Do you really have independent contractors or employees? How have recent changes in federal and state law changed the rules? Are your employees misclassified as 1099 workers and if so why should you take immediate notice?
Many are simply unaware that the base legal definition of an independent contractor relationship substantially changed recently thanks to a landmark US Supreme Court Case. The Court found the relationship wasn’t based mostly upon “control” as previously established but upon the “financial relationship between the parties.” In the old model, employers had to be cautious about exerting too much influence over appointment scheduling and the provision of tools or equipment.
There is a new “A-B-C” test applied to workers in California. To begin with, all workers in California are now presumed to be employees and it is up to the provider of work to prove 1099 workers and independent contractors are not actually employees.
The new ABC test established by the recent Supreme Court ruling requires that any business, entity or individual providing work to a 1099 worker or independent contractor must prove:
A. “that the worker is free from control and direction over performance of the work both under the contract and in fact,” and
B. “that the work provided is outside the usual course of the business for which the work is performed,” and
C.“that the worker is customarily engaged in an independently established trade, occupation or business.”
Now, the evaluation of the relationship between a 1099 worker and the company that provides their work is much more complex. The question of are your employees misclassified as 1099 workers or independent contractors carries substantial, often business ending consequences.
The cost of misclassification is exhorbitant. The California civil penalty for a misclassified employee is $25,000 per incidence, and you will be required to pay all back payroll related taxes for the term of the “employment” (usually several years) as well as benefits, unemployment, workers compensation and other expenses. It is not unusual for the tab to exceed $100,000 per employee.
We invite you to review the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today to discuss your 1099 workers and the underlying relationship indicators. Prevent an audit that could cost your company needed financial resources, and in some cases the business itself.
