One thing is certain for 2017: Misclassifying 1099 Independent Contractors in San Diego will continue to bring substantial financial penalties and threaten the survival of many businesses. The California EDD has made it a high priority for the coming year. The first question you will face in your next EDD business audit (every San Diego business every 3 years) is:
Do you have any 1099 workers? Are they independent contractors or employees?
If the answer is yes, be prepared to provide a mountain of documentation and justification. The new federal and State of California standard for independent contractors comes out of a recent US Supreme Court decision. If you elect to hire 1099 independent contractors or continue this as a business model for 2017 you should make sure of the following:
- Each and every 1099 independent contractor you hire earns less than 60% of their income from your company
- The 1099 independent contractor is not part of your payroll cycle, but issues you an invoice for services rendered as any other vendor would
- The 1099 independent contract has formed their own business entity with their own money, and takes in business from multiple sources
- The duration of the work relationship between you and your 1099 independent contractor is not longer than 6 to 9 months
- The work performed by your 1099 independent contractor is sophisticated or complex enough to require specialized experience, education or training
The key issue is the financial relationship between you and the 1099 independent contractor. The EDD (or the IRS or the US Department of Labor) will assert that you are misclassifying 1099 independent contractors in San Diego if they earn the majority of their income from your company, and the relationship has endured for quite some time. If you are paying a 1099 independent contractor through your payroll system prepare for a tough and perhaps unwinnable battle.
The financial penalty for misclassifying 1099 independent contractors in San Diego is substantial. The base fine civil fine in California is usually $25,000 per worker, compounded by years of back payroll taxes, uncollected unemployment and worker’s compensation fees, unpaid overtime, compensation for benefits denied to the 1099 worker as well as penalties and interest. It is not uncommon for the cost per employee to exceed $100,000 and is often much higher than that. A recent case in Long Beach against an employer with 38 1099 workers amounted to almost $250,000 per worker, bankrupting the business.
We invite you to contact the Watkins Firm to discuss your employment strategy for 2017 and the general business counsel and employer defense services we provide to San Diego employers. Call for a free consult at 858-535-1511.