What will happen to a business who ignores the implications of the Dynamex opinion? Do you believe your entity is “too small” to come to the attention of the IRS, FTB or EDD? What are you risking when you contract with any independent contractor in California?
Download A Free Copy of our White Paper on the Dynamex Decision
Click on the image to the left or here to view or download your free copy of “What You Need to Know about the Recent Dynamex Decision and the Classification of 1099 Workers and Independent Contractors.
Issues of Concern for Employers Regarding the Recent Dymamex Decision
There will be many small, mid-size and large corporations, partnerships, LLCs, S-Corporations and non-profit entities who choose to ignore the game-changing impact of the recent California Supreme Court Opinion in the case of Dynamex Operations West, Inc. v. Superior Court (often referred to simply as “Dynamex”).
“They’ll never find us. We’re too small.”
“Our Independent Contractors only work for a few weeks or months at a time.”
“Our Independent Contractors have their own business entity. Surely this doesn’t apply to me!”
Those business owners, non-profit organizations and entities who choose to ignore the Dynamex opinion are genuinely gambling with their company or entity as well potentially their own financial future. The impact of the Dynamex opinion cannot be exaggerated or overstated.
Independent Contractor or Misclassified Employee
The first thing you must understand about the Dynamex opinion is that it literally changes the nature of worker classification across all businesses, entities and organizations regardless of the nature of your industry or the type of work or business your organization undertakes.
All California agencies (such as the EDD or FTB) and the IRS will immediately work under a new presumption in California that every worker is an employee.
The burden of proof is now upon you as a business owner or shareholder and your company or organization to prove a worker is in fact an independent contractor and not an employee. The business, entity or individual providing work to the independent contractor 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 business for which the work is performed,” and
- “that the worker is customarily engaged in an independently established trade, occupation or business.”
Pay close attention to Item “B” above. The work of an independent contractor cannot have anything to do with your core business, or how you generate customers, income, profit, donations or relationships. If a worker undertakes any work associated with any operational, marketing, sales, support, production, service, delivery or management of your company or non-profit organization they cannot be classified as an independent contractor.
It doesn’t matter how long they perform work, or how often. It doesn’t matter if you create new “projects” or separate business transactions. It doesn’t matter how you attempt to disguise the nature and essence of their work. California agencies and the IRS are intently seeking out, investigating and auditing all California businesses or organizations who have 1099 workers and are not in compliance with the Dynamex Opinion.
It is easy for these agencies to quickly identify you. A simple search within their own databases quickly identifies all entities who submitted a 1099 to the IRS or FTB. The first question the EDD asks any provider of work is “do you have any 1099 workers?” A business who ignores the implications of the Dynamex Opinion risks not only substantial financial consequences, but often the very survival of the company itself.
What Happens if You are Found to Have Misclassified Employees as Independent Contractors
The Dynamex opinion provides all state and federal agencies with the absolute power and authority to simply declare you have misclassified your independent contractors. The EDD, FTB and the IRS do not have to provide any proof. The burden of proof lies solely with you, the business owner, shareholder, employer, non-profit agency or organization to prove otherwise.
What happens to an entity who ignores the implications of the Dynamex Opinion and is found to have misclassified independent contractors?
We invite you to visit the State of California Department of Industrial Relations own website:
It clearly states:
On Sept. 8, 2011, the California legislature passed Senate Bill 459 prohibiting the willful misclassification of individuals as independent contractors. The new legislation, enacted on Oct. 9, 2011, creates civil penalties of between $5,000 and $25,000 per violation. The new law will also prohibit charging fees to or making deductions from the compensation paid to those misclassified workers.
If the agency believes the “employer” has engaged in any pattern or practice of misclassification, the fines are increased to between $10,000 and $25,000 per violation. In practice, the penalties tend toward the higher end of the spectrum specified above. That’s per violation. Separate for each separately misclassified independent contractor.
Your company will be required to place a notice of this violation on a prominent location of your own website for a period of 1 calendar year (or post notice of the violation in each location where the violation occurred in a prominent area which is easily and readily accessible not only to your employees but the general public as well.
The IRS assesses a penalty of 1.5% of the wages paid to an independent contractor. The penalty will be doubled to 3% if your company or entity failed to file the appropriate 1099 with the IRS.
Once intentional misclassification is established, your company or entity will be immediately liable for all federal income tax which should have been withheld from the independent contractor (read: employee) as well as the “employee’s” share of all Medicare and Social Security taxes.
California agencies will require your company to pay all unpaid back state payroll taxes with an additional 10% penalty for “unpaid taxes.” The failure to withhold and pay payroll taxes can be charged as a misdemeanor criminal offense in California, resulting in a fine up to $1,000, a year in jail, or both.
California agencies will then require your company to pay all back unemployment and workers compensation taxes which should have been collected for work performed by the misclassified “employee.”
The next development will likely be a lawsuit from the individual “employee” or a class-action lawsuit on behalf of all of your former independent contractors. These lawsuits will seek additional financial damages seeking payment based upon allegations of unpaid overtime, vacation pay and the monetary value of all benefits which should have been provided throughout the course of the “independent contractor’s” “employment” period.
The sum of the financial consequences for any entity which ignores the implications of the Dynamex Opinion will be staggering for a company or organization of any size. If your business or organization ignores the implications of the Dynamex Opinion and is found to have misclassified employees as independent contractors it may not be able to survive the extent of the resulting financial damages which would lead to the closure of the business and in most cases bankruptcy.
Ok, So Give Me Some Good News!
It’s not too late, but the time to act is NOW. The experienced business, employer and litigation defense attorneys at the Watkins Firm will help you to assess your present independent contractor relationships and strategies and develop new practices which bring you into full compliance with California’s labor laws and the new Dynamex decision.
The cost of our services is usually a fraction compared to the payment of the above costs for a single misclassified employee for small businesses. The potential savings for mid-sized companies and large corporations is exponential. A company who takes proactive action to resolve potential issues of independent contractor or employee misclassification is in a much stronger position with the EDD, FTB and IRS than a business or organization who ignores the implications of the Dynamex Opinion and continues business as usual.
Contact Experienced San Diego Employer, Business and Litigation Defense Attorneys
Any San Diego or Southern California business or organization with independent contractors or 1099 workers who ignores the implications of the Dynamex Opinion risks financial consequences which are genuine, immediate and substantial as well as a genuine threat to the viability of the underlying entity itself.
The Watkins Firm has served the San Diego and Southern California business community for decades. We have a strong reputation and a proven track record of success as well as the experience, expertise and employer-focused related experience necessary to help your company to evaluate present independent contractor operational models, the potential impact of the Dynamex opinion and the development of new strategies to come into compliance with California’s new and existing employment laws.
We invite you to review the recommendations of our clients and the legal industry and contact the Watkins Firm or call 858-535-1511 for a free consultation or to schedule an appointment with one of our business, employer defense and employment attorneys. Learn more about these important developments and how to protect your successful company or organization now and in the future.
The time to take action is now.