A recent California Supreme Court decision requires a new perspective on the misclassification of independent contractors and 1099 workers. The specific case targets businesses who have classified many or all of their workers as independent contractors or 1099 workers.
For many years, California and San Diego employers have utilized 1099 workers or independent contractors as part of the central business strategy. There are two new facts one must give immediate attention and consideration to:
- California now presumes all workers to be employees. The burden of proof to the contrary lies with the provider of work (employer).
- Independent contractors cannot contribute to the central focus or work of the company
The first question in an audit by any state or federal agency, such as the audits employers face every three years from the California EDD, is “how many 1099 workers or independent contractors work for your company?”
Generally speaking, an independent contractor should have started their own company (without seed money or a set up from the employer) which retains complete control over all aspects from pricing, profit and loss as well as when and how work is to be completed. If a general contractor earns more than half of their revenue from a single source it will raise immediate red flags. This new perspective on the misclassification of independent contractors requires employers to genuinely reflect on the nature of the relationship between their company and those who work for it.
Why should you care? If any agency determines your 1099 workers or independent contractors should actually be classified as employees it opens your company up to substantial financial liability. The cost of each misclassified “employee” is staggering, and often threatens the actual survival of the provider of work. Civil fines begin at $5,000 per instance and are usually assessed at $25,000 per misclassified employee. Next, the state and federal tax agencies pursue “unpaid” taxes such as social security, unemployment, disability insurance and other tax-based overhead.
The next shoe to drop is a lawsuit by the employee(s). They will seek back pay, unpaid overtime, compensation for benefits which would have been provided to a full time employee and a host of other sources of compensation. The “look back” period can be as much as 7 years.
What does this mean for any San Diego employer with questions about liabilities associated with misclassification of independent contractors or questions of employment? The federal and state employment and labor agencies and the IRS are closely investigating all companies who employ independent contractors. If you seek new perspective on the misclassification of independent contractors or a review of your business strategy to determine if your workers are independent contractors or actually employees call the experienced employer defense attorneys at the Watkins Firm. The cost for misclassification is simply far too high for most businesses to survive. If you are concerned about employee misclassification or the right method for classifying independent contractors we invite you to review the strong recommendations of our former clients and contact the Watkins Firm or call 858-535-1511 for a free consultation.
