A written contract signed by both parties clearly stating the worker is an independent contractor should suffice to classify that worker as a contractor and not an employee, right? It seems like a reasonable conclusion. Afterall, both parties agreed to this arrangement. But moving forward under the presumption that this agreement alone is enough to withstand a legal challenge is unwise.
What could go wrong? The following will delve into this question and provide more information on how state agencies manage these types of issues so that you understand why compliance is important and also have a better idea of how to comply with these rules and regulations.
What could go wrong? The following will delve into this question and provide more information on how state agencies manage these types of issues so that you understand why compliance is important and also have a better idea of how to comply with these rules and regulations. It is also important to note that employers should be careful what is put into any written agreement. If one or more of the terms implies an employee relationship it will pose a problem. The agreement alone will not provide a finding of independent contractor agreement but it is a good idea to have one. And it should be prepared or reviewed by a tax or employment attorney.
Does it really matter if my business misclassifies an employee as an independent contractor?
This may be your first question. You may wonder whether this is really a big deal, whether you should take the time and resources required to figure out if you follow these requirements and fix any issues if you do not.
In short, yes, it really matters. Federal and state agencies are cracking down on the misclassification of workers and a violation can result in significant penalties. The government loses billions of dollars every year as a result of misclassification. This is because employers do not need to pay certain tax obligations for workers classified as independent contractors. This includes payroll taxes. With these numbers, it is no surprise that state and federal agencies are motivated to crackdown on this issue.
What happens if there are allegations of misclassification?
Allegations can result in an official investigation. When conducting an investigation, California authorities generally operate on the presumption the worker is an employee.
Several state agencies may weigh in on the matter — two of the more notable being the Employment Development Department (EDD) and the Division of Labor Standards Enforcement (DLSE).
During the investigation, the DLSE will take a number of factors into consideration including:
- Control. The agency will look at the level of control the employer has over the worker. A worker with control over their schedule is more likely to qualify as a contractor.
- Supplies. It will also review who owns the supplies used to complete the job. A worker who uses their own tools to complete the job is more likely a contractor, while the agency is more likely to consider one who uses the business’ tools as an employee.
- Payment. Another important consideration involves how the employer pays the worker. Payment with job completion is more likely a contractor while payment by the hour more likely an employee.
Unfortunately, even with these factors to help guide these relationships the reality of the relationship between the employer and the worker in the eyes of the EDD is not always clear. This brings us back to our initial question about a written agreement. What happens when both parties agreed that the worker was serving as an independent contractor? The agency may consider a written agreement and the presence of a 1099 as a factor along with the others noted above, but it is not determinative.
How will I know if there is an issue with how my business classified workers?
Any employer that is concerned about worker classification issues is wise to act to protect their interests. This can include an internal audit to review classification and a plan to make changes as needed to comply with applicable rules and regulations.
It is also possible the EDD will send a notice of an audit examination. Those who receive such a notice are wise to take it seriously. There are options once under investigation, but additional measures to protect your interests are wise. As these options vary depending on the situation, it is best to discuss the matter with an attorney.
Is there anything else I should know about these types of disputes?
It is important to note that this information focuses specifically on California state agencies and their approach to the matter. The IRS and EDD have different tests to determine worker classification.