The misclassification of independent contractors is expensive and in many cases can threaten the financial viability of a company or corporation. How can a San Diego employer avoid the expense of employee misclassification as a result of changes in laws applying to independent contractors?
What is the New Law Regarding Workers in California
What are the new laws, and how does that effect present independent contractor relationships? A recent landmark case in the Supreme Court has fundamentally changed the legal definition of an independent contractor, providing state agencies and plaintiff’s firms (through PAGA actions) with the tools necessary to declare misclassification of employees leading to significant liabilities and civil penalties, back pay, overtime payments, as well as back taxes, FICA, unemployment and workers compensation payments.
California now legally presumes that every worker is in fact an employee. The legal burden of proof has been shifted to the employer, the provider of work, to prove that the efforts of an independent contractor have nothing to do with the core business of the provider of work, nor contribute directly to the income or profitability of the hiring company.
The new A-B-C test makes it very difficult for any employer to justify making any worker an independent contractor. This exposure grows greater as time passes and additional work is done to advance the primary business objectives of the work provider.
The Misclassification of Independent Contractors is Expensive in California
The misclassification of independent contractors is expensive and the costs to a San Diego employer can be staggering. The process is usually triggered by the California Labor Board, a “status audit” conducted by the California EDD, the filing of an unemployment claim by a terminated independent contractor or even the findings by the IRS or the US Department of Labor,. The nature of the relationship between your company and independent contractors will be questioned, and these agencies are relentlessly pursuing new sources of revenues at the expense of your bottom line profit.
What has changed? The recent California Supreme Court decision established the new A-B-C guidelines for reviewing the work and financial relationship between the company providing the work and the independent contractor. If an agency finds “employees” have been misclassified as independent contractors the provider of work is exposed to substantial, often business ending penalties over a lookback period of several years.
This includes, but is not limited to a civil fine of up to $25,000 per occurrence, as well as back payroll taxes such as unemployment, employment training, State Disability Insurance (SDI), workers’ compensation, social security (FICA), as well as personal income taxes which should have been owed by the “employee.”
However, it doesn’t stop there. Plaintiff’s attorneys are actively recruiting misclassified employees to pursue a PAGA action which exposes your company to even greater risks as well as exposure to lookback penalties for unpaid overtime, vacation and sick leave as well as unreimbursed healthcare and other benefits provided to “employees.”
Can Anyone be an Independent Contractor in California?
Yes, but it is a very difficult test to pass. You are safer if your independent contractors are required to have a professional license, or require extensive specialized skills, education or training in order to accomplish the work. The easier it is for the work to be completed and the more it contributes to the central focus of your business the more likely an independent contractor will be reclassified as an employee.
The misclassification of independent contractors is expensive in California. Protect yourself. Learn about changes in the independent contractor laws and how you should evaluate these critical business relationships.
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. Learn how to avoid the expense of employee misclassification audits, and come into compliance with new federal and state law.
