What are the financial risks of a misclassified independent contractor in San Diego and Southern California? What recent major changes in law, and resulting strategies by the IRS, EDD, FTB and the California Labor Board are a genuine threat to your money and your company? When is a worker an independent contractor, and when are they considered to be an employee? What are the costs to an employer when a government agency orders the reclassification of independent contractors as employees? These questions are on the minds of all California employers who have independent contractors as part of their workforce.
The A-B-C Test for California Workers
It is important to understand one of the most recent changes in California law: All workers in California are legally presumed to be employees. If the classification of a worker is a 1099 or independent contractor the legal burden of proof now falls upon the employer.
In order to determine if the worker qualifies as an independent contractor or 1099 worker is known as the “A-B-C Test.” In order to qualify as a 1099 worker or independent contractor, the employer must prove:
- “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 businessfor which the work is performed,” and
- “that the worker is customarily engaged in an independently established trade, occupation or business.”
Most present 1099 workers and independent contractor relationships in California will not meet these requirements.
The Extensive Financial Risks of a Misclassified Independent Contractor in Southern California
One of the first financial risks of a misclassified independent contractor facing a California employer is a civil penalty ranging from $5,000 to $25,000 per incidence. Most cases are assessed at the higher penalty, especially if there is more than one misclassified employee associated with the case. This is a substantial burden in and of itself.
The financial risks of a misclassified independent contractor in San Diego and Southern California opens the door to “overtime” claims, and extensive rates of pay for work performed above 8 hours a day or 40 hours per work week. The Courts and California agencies tend to take the word of the employee in these cases, and required documentation is almost non-existent. Next, an employer would be required to pay all uncollected back payroll taxes, FICA, unemployment and workers compensation insurance. Employers are not allowed to make deductions or charge any “fees” associated with any of these payments.
The next conversation will relate to ERISA benefits, and the retirement and healthcare related benefits that “should” have been provided to the (now) “employee” due to the misclassification of an independent contractor. The numbers associated with healthcare reimbursement alone can be a substantial financial burden. The next knocks at the door are the IRS, and California’s tax authorities who are prepared to re-calculate your taxes going back several years due to the misclassification of an independent contractor.
At any point along the way, the employer should also expect to hear from plaintiffs attorneys who will be filing a California Private Attorneys General Act or PAGA action. These cases provide not only extensive access to records and other financial discovery for all present and former employees, the allow the affected employees to keep a portion of any resulting fines or settlement.
The ”look-back” period for employee-related financial damage claims is four years. It is easy to see why these cases quickly result in extensive legal and financial damages for the employer.
An Experienced, Proven San Diego Employer Defense Attorney
The financial risks of a misclassified independent contractor are quite daunting. The potential damage exposure to San Diego and Southern California employers is immediate and genuine. Protect yourself. If you utilize independent contractors or 1099 workers as part of your employment strategy it is important to review our podcast Episode 28 – Common Employer Disputes and Defenses, the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 to speak with the experienced labor and employer defense attorneys at the Watkins Firm for a free and substantive consultation. We will review existing relationships, and help you to modify any contracts, policies, procedures or practices that are not in full compliance with new laws associated with the central question of “independent contractor or employee?”
