Recent independent contractor ruling will change San Diego business for years to come. The important California Supreme Court decision in the Dynamex case makes it much more difficult for a San Diego business to utilize independent contractors as part of their overall business strategy. This is especially true when the work performed by an independent contractor is associated with the core of your business.
In a landmark and game-changing decision, The California Supreme Court has established the presumption under California law that all workers are employees. If a company or non-profit wishes to provide work to an independent contractor or 1099 worker, the provider of work must be able to prove the following three prongs of a new “ABC” test:
- “that the worker is free from control and direction over performance of the work both under the contract and in fact,” and
- “that the work provided is outside the usual course of the business for which the work is performed,” and
- “that the worker is customarily engaged in an independently established trade, occupation or business.”
This recent independent contractor ruling will change San Diego business forever and make it much easier for any one of several federal or state agencies to declare your company’s 1099 independent contractors to be misclassified employees. The burden will then fall upon you to prove they are actually not employees using the three prongs of the above test. In most cases, independent contractors will fail one or more of the above prongs resulting in a finding of misclassification.
What follows is a quickly cascading, expensive and potentially business-threatening experience. The civil fine in California for misclassification is $25,000 per incident. Your company will then be compelled to pay all of the back federal and state income taxes for the misclassified “employee” – as you would have collected if they had been “properly” classified. In addition, you will be exposed to a penalty of 1.5% of the wages paid to an independent contractor by the IRS, and an additional 10% penalty to California for “unpaid taxes.” Next follows the same collection of unemployment, workers compensation, Medicare and Social Security.
The look-back period on these fines is four years. The resulting cost per misclassified independent contractor quickly approaches and exceeds six figures!
This recent independent contractor ruling will change San Diego business for the foreseeable future and requires a re-examination of present 1099 and independent contractor strategies. The Watkins Firm provides sound counsel to help clients come into compliance with this challenging ruling and reduce exposure to the draconian penalties associated with this ruling which can threaten the very existence of you company. 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.
