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? Many are simply unaware that the base legal definition of an independent contractor relationship changed over a year ago 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.
Now, the evaluation of the relationship between a 1099 worker and the company that provides their work is much more complex. It is based upon the percentage of the 1099 worker’s income that is provided by a single source (your company). If that percentage exceeds 60% you must be prepared for a head-on fight with a federal or California agency who holds most of the cards.
The agency will look into other aspects of the relationship. Has the work continued for more than 6 months? Is the work performed under a 1099 relationship higher quality or more sophisticated work than most employees could perform requiring additional skill, education, training or even licensing? How was the independent contractor’s own business entity formed and where did the money to start their company come from? If you are paying your 1099 workers out of your normal payroll system this is a huge red flag. If the worker is not providing a separate invoice from a separate business entity the agency will no doubt rule you have employees misclassified as 1099 workers and come down full force.
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 contact the Watkins Firm for a free consultation 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.