The California public and legislators have classification of workers on their minds. Employers who violate the separate rules for independent contractors and employees can face stiff penalties and big bills for unpaid taxes and interest.
In times like these, clients might increasingly sue accountants, alleging malpractice for recommending the wrong classification. Unlike a client’s books, the court system is ordinarily public making a malpractice lawsuit seem especially threatening.
Best practices help prevent and defend against lawsuits
Clients are responsible for classifying their workers correctly.
For example, reading California’s ABC test for telling a contractor from an employee shows that it addresses what happens “on the shop floor,” as the expression goes. It is clearly not a test meant for accountants to take on their clients’ behalf.
There are steps a CPA can take to reduce risk when working with businesses.
Consider having the client agree repeatedly and in writing that they know their duty, take responsibility for it and free the accountant of blame for misclassification. Those are also good moments to restate the ABC test and other rules for worker classification and to remind them that attorneys can answer questions about employment and tax law.
It is a good idea to keep records of all verbal and written reminders of your and your client’s respective duties, as well as your suggestions for the client to consult other advisors such as attorneys and human resource experts.
Things to consider when trouble starts
Even when a lawsuit only appears possible, contacting your insurer is typically the first step. This is what insurance is for, and the insurer may have good news, for example in paying for legal counsel.
Attorneys with experience defending licensed professionals will understand the stakes and the kinds of relationships and obligations an accountant’s job requires.
An accounting malpractice case is like a medical malpractice case in some ways, as in the way they almost always depend on the “standard of care” in the profession.
The issue is almost never whether the doctor or accountant made any mistakes or missed something. Everybody makes mistakes and nobody can know everything.
Instead, the question is more often whether the accountant’s actions were unreasonable given the challenges they faced and what we can reasonably expect from client-accountant relationships.