There is genuine concern about the growing threat of misclassified independent contractors and resulting audits by the IRS and California agencies such as the EDD? The threat and associated liabilities are genuine and immediate. Recent developments based upon a recent California Supreme Court case (Dynamex) have changed the nature of the classification of independent contractors. How have recent developments changed the methods of classifying independent contractors? What is the genuine risk to my company? What factors should I consider and how can I reduce my exposure and liability?
The “old way” of justifying an independent contractor relationship was based in most part upon issues of control. Does the company providing the work control the schedule of the worker, the quality of work to be accomplished and provide tools and technology to accomplish the work? It doesn’t take a Harvard Business School graduate to understand the huge cost savings of misclassified independent contractors versus an employee relationship. The savings in payroll taxes, benefits, unemployment, workers’ compensation and overtime are easily calculated. Yet this is the basis for your greatest risk.
What risks do you face as a result of the Dynamex decision? Consider having to retroactively pay each independent contractor as if they were an employee, including all payroll taxes, benefits, workers compensation and unemployment, in addition to a civil penalty for misclassification of $5,000 to $25,000 per incident to the State of California. You are not allowed to make any deductions from these payments, or charge any “fees”. You will next be required to pay all back payroll taxes, unemployment, workers compensation and other federal, state and local payroll taxes for a look-back period of four years.
The next step is a lawsuit by the former independent contractor, now employee, seeking unpaid overtime and compensation for benefits they would have been entitled to as an employee such as healthcare and matching retirement contributions. The agencies and courts will side with the employee, and this issue has generated liabilities that financially hamstring businesses, or force the closure of a company outright.
The new rules are generally based upon the economic relationship between the parties. How much of the independent contractor’s income comes directly from your company? If you represent more than half of their income, you face tremendous potential liability. The difficulty of the work performed and the skill required to do so are also new factors in this equation.
It is time to reconsider how you classify workers in your business. The genuine concern about the growing threat of misclassified independent contractors requires your immediate attention. This issue can and will cost your business a tremendous amount of money. We invite you to contact us or call today for a complimentary and substantive consultation at 858-535-1511. Learn about the new laws, and understand the contingent liabilities you face.