Reclassification of Independent Contractors and 1099 Workers

How can the Watkins Firm help your business to become compliant with Dynamex through the reclassification of independent contractors and 1099 workers?  What is the impact of the new California Supreme Court Dynamex Opinion and what are your risks in the light of this game-changing California Supreme Court opinion and what are your risks going forward?

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Click on the image to the left or here to view or download your free copy of “What You Need to Know about the Recent Dynamex Decision and the Classification of 1099 Workers and Independent Contractors.  



Issues of Concern for Employers Regarding the Recent Dymamex Decision

The two primary issues of concern for San Diego employers and companies who utilize independent contractors are found within the recent California Supreme Court Opinion in the case of Dynamex Operations West, Inc. v. Superior Court (often referred to simply as “Dynamex”).  The opinion clearly states:

From this point forward California employment classification is based upon the presumption that a worker is an employee.

This important distinction places the responsibility squarely upon the shoulders of business owners and employers to prove a worker is in fact an independent contractor and not an employee.  The business, entity or individual providing work to the independent contractor or 1099 worker must prove:

  1. “that the worker is free from control and direction over performance of the work both under the contract and in fact,” and
  2. “that the work provided is outside the usual course of the business for which the work is performed,” and
  3. “that the worker is customarily engaged in an independently established trade, occupation or business.”

The vast majority of workers classified as independent contractors in California will fail the second test contained in “B” above.  It is also important to note the new ABC test says nothing about the duration of the work to be performed or the structure of the entity associated with the independent contractor.

How will this major change in California law impact your business or non-profit entity going forward and how can your entity ensure compliance with Dynamex going forward?

Reclassification of Independent Contractors

The Watkins Firm’s experienced employment and business attorneys work with our business and non-profit clients to review the actual nature of the relationship between our clients and their 1099 workers and independent contractors.  We will work with our clients to craft a new strategy which brings them into compliance with all California labor and employment laws as well as the new regulations imposed under Dynamex.

In most cases it will be necessary to craft a new contract for these workers which reflects the nature of work to be performed, the payment for services rendered, taxation and payroll related deductions as well as the qualification of an individual or entity to qualify for benefits in order to become compliant with Dynamex.  It is also important to consider the recent SCOTUS Epic Systems v Lewis ruling and the ability to reduce exposure to class action arbitration and associated lawsuits.

What If a Business or Non-Profit Refuses to Become Compliant with Dynamex

Most businesses and employers find this development extremely troubling and balk at the perceived expenses associated with the changes forced upon providers of work under Dynamex.

The simple fact is the IRS and California’s EDD and FTB have virtually unbridled power to simply declare that independent contractors and 1099 workers are misclassified employees.  The ABC test above makes it exceptionally difficult to challenge or prevent these assertions.

This will lead to the following financial (and potentially criminal) consequences:

  • California Civil penalties for misclassification, usually between $10,000 and $25,000 per misclassified employee
  • Requirement to post on your website and in prominent public location to notify other workers of misclassification
  • IRS will levy a penalty of 1.5% of the wages paid to an independent contractor, doubled to 3% if 1099 wasn’t filed
  • Payment of back federal income tax, Medicare and Social Security for up to the past 4 years for each instance
  • Payment of all back California state payroll taxes which should have been collected from 1099 worker
  • 10% for “unpaid taxes” for all State of California taxes which should have been collected in look-back period
  • Exposure to misdemeanor criminal charges for failure to withhold and pay payroll taxes $1,000 fine/1 Year in Jail
  • Payment of all California Workers Compensation and Unemployment taxes for each 1099 for look-back period
  • Individual lawsuit or class-action lawsuit by misclassified “employees” seeking substantial financial damages including unpaid overtime, vacation pay, and the monetary value of all benefits which would have been extended to an employee

The sum of these financial consequences will be staggering for a single misclassified independent contractor, let alone a number of them.  The size of your company or organization will not be a factor in this process and the threat to your viability or the actual survival of your entity (including dissolution or bankruptcy) will not be taken into consideration.  The risks associated with the failure to become compliant with Dynamex cannot be overstated.

Work With the Experienced Business and Employment Attorneys at Watkins Firm and Come Into Compliance

It is important to work with the experienced business and employment attorneys at the Watkins Firm to become compliant with Dynamex in an immediate time frame.  The successful completion of reclassification will in all likelihood not prevent accountability for past or present allegations or employee complaints.  It is too soon to tell how the agencies and courts will handle complaints which arise after reclassification is completed and while your company is within compliance with Dynamex.

The net takeaway is simply this:

There is no avoiding the draconian penalties and financial consequences all California businesses and non-profit entities face for misclassification going forward.  The rules and presumptions of employment have been completely changed.  The sooner you take action to address independent contractors and 1099 workers the lower your financial exposure will be in the future.

We invite you to review the comments of our clients and the recommendations of the legal industry and contact the Watkins Firm or call 858-535-1511 for a free consultation.  Learn about the sound advice, counsel and services we can provide to promptly compliant with Dynamex and California law while protecting your entity from severe financial consequences and the genuine prospect of a business-ending misclassification ruling against your organization.