Business Attorneys Serving California and San Diego Employers
What is the legal basis for classifying a worker as an “independent contractor” or an “employee,” and what impact can that decision have upon your business? What impact do recent US Supreme Court decisions and changes in California employment law have upon area employers? What are some of the risk factors associated with the decision of independent contractor or employee?
The decision to classify a worker as an “independent contractor” instead of hiring them as an “employee” has significant and immediate economic impact to San Diego employers. Businesses who employ independent contractors are not required to collect many payroll related taxes, insurance and other costs such as:
- Payroll taxes
- Employer Matching Taxes and FICA
- Workers’ Compensation
- Company Benefits
However, the misclassification of a worker as an independent contractor (instead of as an employee) opens California employers to civil penalties of $5,000 to $25,000 per infraction, as well as substantial audit risk and exposure to IRS and State of California agency findings that demand payment of “look-back” employment related taxes, penalties, and interest as well as unemployment and workers’ compensation payments.
The “Old” Basis of Establishing an Independent Contractor and “New” Legal Developments
For many years, California employers (and even the IRS) based these evaluations upon guidelines and legal interpretations that arose from a case against Microsoft late last century. The result of this case were several “tests” that an employer would apply including:
- Control of Work Schedule
- Provision of Tools or Technology to Perform Work
- Control Over How Work Was Performed
- Presence of a Business License
The federal government and the State of California have been searching for ways to question the validity of an “independent contractor” classification. For example, in a recent US Supreme Court Decision (United States v. Silk) the Court expanded the focus to include questions of the financial relationship between the business and the independent contractor.
This important decision affirmed questions regarding the degree of control exercised by the “alleged” employer, but added questions including:
- The extent of the relative investments made by the Business and the Independent Contractor
- The degree to which the profit or loss by the independent contractor was determined by the business for whom they performed work
- The skill and initiative required to perform the work
- The permanency of the relationship
California expands this discussion to encompass the question of whether the services provided by independent contractors were an “integral part” of the hiring company’s business. As a result, US and California Courts are basing a large portion of their analysis on the realities of the independent contractor’s “economic dependence” upon the company who provides and pays for their work.
How Do You Make a Sound Business Decision Between Designating Workers as an Independent Contractor or Employee?
Independent contractor or employee? These decisions are quite legally complex, and the realities of actions taken by California tax and employment agencies and the IRS must be balanced with employment related laws. The Watkins Firm is uniquely positioned to advise California businesses and employers on the crucial question of “Independent Contractor or Employee?” We support our clients through the analysis of work relationships, the development of contracts for employment and independent contractors, and the policies and procedures that guide employers in these matters.
We also represent and defend California and San Diego employers in litigation associated with wage and hour issues, as well as discrimination, retaliation and harassment related lawsuits. Come into full compliance with Federal, State and local employment laws and protect yourself from civil penalties and financial liabilities associated with employment classification. We invite you to contact us or call 858-535-1511 for a complimentary and substantive consultation.