by Kim Silvers, SPHR-CA
Independent contractors are becoming a dying breed in these United States. We’ve seen several cases this year where individuals have been found to be misclassified as independent contractors. The back taxes and penalties (think FICA match, unemployment insurance, workers’ compensation premiums, liability for stock options and benefits) are staggering. In many cases, the worker has asked (sometimes demanded) to be an independent contractor only have the IRS or state Employment Development Department (EDD) second guess the employer’s classification when auditing a 1099.
The US Department of Labor recently announced it has awarded more than $10 million to 19 states, including California, to audit worker misclassification where workers are improperly classified as independent contractors or fail to report the wages paid to workers. We’re finding more of our clients are receiving notices of an EDD audit to review the classification of individuals who have received a 1099. Be especially careful of paying individuals who have been employed (received a W-2) and also received a 1099 in the same or later years.
The CA Department of Industrial Relations (DIR) lists the primary factors for determining when a worker is an employee or independent contractor. The following factors were adopted by the California Supreme Court in the case of S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989). Our comments are in italics:
- Whether the person performing services is engaged in an occupation or business distinct from that of the principal; (The more similar the worker’s role to your business operations the more likely the worker is an employee.)
- Whether or not the work is a part of the regular business of the principal or alleged employer; (The closer the work is to the core of your business (the reason you are in business) the more likely the worker is an employee.)
- Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work; (If you furnish the computer and work station then the worker is closer to the employee side of the scale.)
- The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers; (Again, you buy the equipment and it’s closer to the employee classification.)
- Whether the service rendered requires a special skill; ( If the skill is unique and not core to your business, say an HR consultant or bookkeeper, then the worker may be closer to the independent contractor/vendor definition.)
- The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (The more supervision needed, the more the worker looks like an employee.)
- The alleged employee’s opportunity for profit or loss depending on his or her managerial skill; (An employee would not usually suffer or gain significantly based on the employer’s profitability.)
- The length of time for which the services are to be performed; (The longer the assignment the more the work shifts to the employee classification.)
- The degree of permanence of the working relationship; (A long term assignment leans toward the employee side.)
- The method of payment, whether by time or by the job; (Paying by the hour leans toward the employee side.) and
- Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests. (Ensure you have a vendor agreement and the worker has a federal EIN and W-9, at minimum.)
The DIR also has a helpful list of frequently asked questions here. Note that all questions and answers are skewed toward the worker.
Recently, the 9th Circuit Court of Appeals ruled that 2300 FedEx delivery drivers long classified as independent contractors, are actually employees. Although FedEx maintained that the drivers signed an independent contractor operating agreement, the Court was not persuaded. The Court looked at the employer’s control over work standards such as the drivers’ appearance, the vehicles’ appearance (although owned by the drivers), the times the drivers were able to work, and how the drivers delivered the packages. If you think this won’t affect the cost of shipping, think again.
Close to home, the Superior Court of Sacramento ruled that a class of the Sacramento Bee newspaper carriers working for the Bee from 2005 through 2009 were misclassified as independent contractors. The plaintiffs are demanding that McClatchy, the Bee’s parent company, reimburse them for mileage expense, as required to be paid for employees in California. As a Bee subscriber, I suspect this is another nail in the coffin of the printed press industry.
We encourage employers to reconsider any independent contractors who are doing work that is a core part of their business and in which the employer exercises significant control over hours, means, methods of work and equipment. At minimum, it will be important to review the position with legal counsel to ensure it is defensible as an independent contractor classification. Under California’s SB 459 any consultant, non-practicing lawyer or other person who receives valuable consideration for knowingly advising an employer to treat an individual as an independent contractor to avoid employee status will be jointly and severally liable with the employer if that individual is determined by the court or an agency not to be an independent contractor. As a result, we can longer advise employers on engaging with independent contractors. And if we won’t take that chance, should you?
© 2014 Silvers HR, LLC