Georgia asks about new developments in the area of Independent Contractors vs. Employees both from the IRS perspective and EDD. Improperly characterizing an employee as an independent contractor can have some significant negative effects. Not only will the worker be entitled to all of the protections that come with being an employee (e.g., overtime, timely payment of wages, reimbursement of expenses, protection from discrimination, etc.), the employer could be subject to significant penalties by the EDD, the IRS, the Franchise Tax Board, and the Department of Industrial Relations. Additionally, you may end up losing workers’ compensation coverage when the insurance company realizes the workers were misclassified.
The New York Times recently reported that “Federal and state officials, many facing record budget deficits, are starting to aggressively pursue companies that try to pass off regular employees as independent contractors.” The same article indicates that the President’s 2010 budget “assumes that the federal crackdown will yield at least $7 billion over 10 years. More than two dozen states also have stepped up enforcement, often by enacting stricter penalties for misclassifying workers.”
Chintamani Abhyankar, author of “Stop Donating your Money to IRS,” reports that the IRS has begun a three-year audit of 6,000 randomly chosen businesses of all types, sizes, and shapes to investigate any sort of suspicion of tax infractions. According to Abhyankar, “they believe that the IRS is just gearing up for a run at businesses under the new administration.”
The Division of Labor Standards Enforcement (Labor Commissioner) provides the following caution:
There is no set definition of the term “independent contractor” and as such, one must look to the interpretations of the courts and enforcement agencies to decide if in a particular situation a worker is an employee or independent contractor. In handling a matter where employment status is an issue, that is, employee or independent contractor, DLSE starts with the presumption that the worker is an employee. Labor Code Section 3357. This is a rebuttable presumption however, and the actual determination of whether a worker is an employee or independent contractor depends upon a number of factors, all of which must be considered, and none of which is controlling by itself. Consequently, it is necessary to closely examine the facts of each service relationship and then apply the law to those facts. For most matters before the Division of Labor Standards Enforcement (DLSE), depending on the remedial nature of the legislation at issue, this means applying the “multi-factor” or the “economic realities” test adopted by the California Supreme Court in the case of S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341. In applying the economic realities test, the most significant factor to be considered is whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker both as to the work done and the manner and means in which it is performed. Additional factors that may be considered depending on the issue involved are:
- Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
- Whether or not the work is a part of the regular business of the principal or alleged employer;
- Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
- The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
- Whether the service rendered requires a special skill;
- 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 alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
- The length of time for which the services are to be performed;
- The degree of permanence of the working relationship;
- The method of payment, whether by time or by the job; 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.
Even where there is an absence of control over work details, an employer-employee relationship will be found if (1) the principal retains pervasive control over the operation as a whole, (2) the worker’s duties are an integral part of the operation, and (3) the nature of the work makes detailed control unnecessary. (Yellow Cab Cooperative v. Workers Compensation Appeals Board (1991) 226 Cal.App.3d 1288)
Other points to remember in determining whether a worker is an employee or independent contractor are that the existence of a written agreement purporting to establish an independent contractor relationship is not determinative (Borello, Id.at 349), and the fact that a worker is issued a 1099 form rather than a W-2 form is also not determinative with respect to independent contractor status. (Toyota Motor Sales v. Superior Court (1990) 220 Cal.App.3d 864, 877)
The problem is compounded by the fact that different agencies can come to different conclusions. That same article makes it clear that the Labor Commissioner and the EDD do not always agree on what is an employee versus what is an independent contractor:
Q. How can it be that the Labor Commissioner determined I was an employee with respect to a wage claim I filed and won, and the Employment Development Department (EDD) determined I was an independent contractor, and denied my claim for unemployment insurance benefits?
A. There is no set definition of the term “independent contractor” for all purposes, and the issue of whether a worker is an employee or independent contractor depends upon the particular area of law to be applied. For example, in a wage claim where employment status is an issue, DLSE will often use the five-prong economic realities test to decide the issue. However, in a separate matter before a different state agency with the same parties and same facts, and employment status again being an issue, that agency may be required to use a different test, for example, the “control test,” which may result in a different determination. Thus, it is possible that the same individual will be considered an employee for purposes of one law and an independent contractor under another.
Even court decisions are not always helpful. In Messenger Courier Ass’n of the Americas v. CUIAB, 175 Cal. App. 4th 1074 (2009) the court found that messengers were properly characterized as employees. But in Cristler v. Express Messenger Systems, Inc., 171 Cal. App. 4th 72 (2009), another messenger case, the messengers were independent contractors.
The reality is that if you are using independent contractors to perform the same work as your employees, or if the independent contractors are doing the work that you are in business to perform, you should speak with an attorney knowledgeable about proper classification.Phillip J. Griego & Associates 95 South Market Street, Suite 520 San Jose, CA 95113 Tel. 408-293-6341
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