The misclassification of independent contractors depends more upon financial relationship between the parties, than in the degree of control the hiring company exerts. According to a recent US Supreme Court ruling – the IRS, federal and California state agencies should look more to the extent of the financial dependency of the independent contractor to the work provider, as well as the type of work performed and the importance of that work to the core business function of the company providing the work. The financial liabilities for misclassification are quite substantial, and can easily exceed $50,000 or more per worker.
The first measure – the financial relationship between the parties – has three main components. The first is the percentage of the income of the independent contractor originating from the work provider. If independent contractors earn more than 60% of their income from a single source, it is much more likely to be considered an “employer/employee” relationship than an independent contractor. Another indicator is the nature of the business entity of the independent contractor, the amount of investment required to start that entity, and the source of the investment. If the parent company funded the start-up or formed the entity, the relationship will probably be classified as an employee. The third financial element is the provision of technology (phone, computer, etc) or tools required to accomplish the work involved.
The type of work performed, and the skill required to do so are two new important factors when an employer is suspected of misclassification of independent contractors when the worker should have been hired as an “employee.” If the work associated with an independent contractor can be performed without extensive skill, or the need for a professional license, specialized training or education the worker will be classified as an employee. In addition, the work of independent contractors should be questioned if it is a core element in the business of the work provider.
The Supreme Court also questioned the length of the relationship between the parties. If the relationship exists for more than a year, the likelihood of misclassification is much higher. These changes create many challenges for San Diego employers.
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.
