Business Law, employment law, Legal

Let’s Make Everyone An Independent Contractor!

Although the idea of converting all employees to Independent Contractor to avoid Wage and Hour headaches as well as payroll taxes sounds like Manna from heaven, it guarantees that you will be found liable for violations under California Employment laws.

Mislabeling a worker as an independent contractor creates potential liability for employment taxes and penalties, and liability for failure to fulfill the many legal obligations owed to an employee, such as wage and hour requirements. California courts have decided several cases about who is, or is not, an independent contractor. Cases have been brought for failure to pay overtime, as well as for other labor code violations.

California administrative agencies, the federal Department of Labor (DOL) and the Internal Revenue Service (IRS) closely scrutinize alleged principal/independent contractor relationships to ensure that those relationships are not, in reality, employer/employee relationships. Enforcement efforts to combat misclassification are on the rise.

Challenges to the legitimacy of an existing independent contractor/principal relationship can arise in many forms, including:

  • Filings for unemployment insurance (UI) benefits
  • Claims for unpaid wages
  • Claims for workers’ compensation
  • Charges of employment discrimination
  • Investigations by the IRS, the DOL, the Department of Industrial Relations (DIR) and Employment Development Department (EDD) to audit wage payments, workers’ compensation coverage and Unemployment Insurance Fund contributions

Willful Misclassification

It is unlawful for any person or employer to “willfully misclassify” an individual as an independent contractor. The law also prohibits employers from charging a misclassified independent contractor for goods, materials, space, rental, services, government licenses, repairs, equipment maintenance or fines that arise from the individual’s employment, if the charges would have violated the law if the person had been an employee.1

Willful misclassification means: “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.”

The civil penalty for violation of this law ranges from $5,000 to $25,000 for each violation. Other remedies include requiring the employer to display on its website or in the workplace a notice of the serious violation of misclassifying an independent contractor, a statement that the employer has changed its business practices in order to comply with the law, and information on how to contact the California Labor and Workforce Development Agency to report misclassification.

The notice must be posted for one year, and signed by an officer of the employer.

The law also imposes joint liability on a person who is retained to assist with classification and who knowingly advises an employer to treat an individual as an independent contractor to avoid employee status. Joint liability does not apply to a licensed attorney or to a person who provides advice to his or her own employer. Joint liability would apply to a non-attorney outside consultant.

These civil penalties are in addition to any fines or taxes owed to the DOL, IRS or the EDD or any unpaid wages owed to workers.

Defining Independent Contractor

California labor law defines an independent contractor as “any person who renders service for a specified recompense for a specified result, under the control of his principal as to the result of his work only and not as to the means by which such result is accomplished.”2

An independent contractor works for another entity under a verbal or written contract, usually for a specific length of time. The independent contractor is responsible for only his/her own work, and is generally responsible for his/her own schedule. The independent contractor must also be responsible for how the work is completed.

  • You should assume all workers are employees unless they clearly meet all legal requirements and pass all tests various federal and state agencies use for proper classification of independent contractors. Consultation with legal counsel is usually warranted.

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