What are the questions the EDD and agencies ask to identify misclassified workers? What do you need to know as an employer in San Diego? The California Employment Development Department and the United States Department of Labor (DOL) continue to work with other California agencies and the IRS cracking down on employers who have independent contractors.
A recent California Supreme Court decisions has substantially changed the playing field. The new ruling establishes the legal precedent that all California workers are to be considered “employees” unless and until the employer can prove they are not. In other words, the legal burden of proof in these cases just shifted from the government to the employer.
The results of this case lead the agencies to believe there should be very few independent contractors, and that most existing independent contractors and 1099 workers are misclassified. What are the questions the EDD and agencies ask to identify misclassified workers and how can you protect your company and business operations?
Typical Questions the EDD and Agencies Ask to Identify Misclassified Workers
Is the work performed associated with your central business objectives or activities? – the new law basically says if a worker is doing any work directly associated with your company’s course of business the worker should be classified as an employee. For example, a delivery driver is accomplishing tasks essential to the central business model. If your company needs to have the wiring in your building updated, that work is not a component of what your central course of business entails (unless your business is the installation of wiring).
The duration of the project – If the work being performed has no end date or project completion measure in place, the agencies believe it is much more likely to be an employment relationship and not an independent contract.
Does your independent contractor control profit or loss? True independent contractors run their own business, and are free to make decisions and deploy assets and resources in a way that creates profit or generates a loss.
Do you pay your independent contractors hourly? The agencies believes independent contractors should be paid based upon progress upon a project. If you are paying them hourly they are much more likely to be considered as employees. Additionally, do your independent contractors invoice you for the work performed? Genuinely separate companies doing business together would never issues payment unless and invoice was generated.
Do your independent contractors have their own business entity, a separate business account, taxpayer IDs for the company and have more than one customer? Independent contractors should not receive more than 60% of their income from a single source according to the recent court decision. They should have a separate company which they, themselves have established and the start-up funding source must be traceable. If they don’t have other clients, your company should be concerned about the questions an agency will be asking to determine misclassified independent contractors who should be employees. Your company could be next.
This Isn’t Just About Large Employers Any More
The most recent business targeted by the DOL and California agencies have less than 50 employees. If you have independent contractors and issue 1099’s you can bet that a federal or state agency will be looking into your business operations in the next few years. The cost for misclassification is substantial, and the accumulated costs for an employee or two could be enough to bring your company to financial ruin.
Why should you be concerned about the questions the EDD and agencies ask to identify misclassified workers in San Diego and Southern California? Consider the small LA trucking company who recently had to file for bankruptcy protection after a DOL finding resulted in penalties of more than $200,000 per driver.
The attorneys at the Watkins Firm can help you to assess the situation and provide insight and guidance that could help you to avoid the loss of your business. 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.
