The Anastasi Law Firm offers its clients affordable, fair and prompt solutions. The Anastasi Law Firm provides proactive legal services designed for asset protection of business owners and their company. You can be assured the 29 years of business lawyer experience will be applied to provide you with the most cost effective and reasonable solution available.
Warning: Do not attempt to “save” money and treat/pay an “employee” as an independent contractor; the legal and financial risks are very high.
One of California’s greatest business litigation risk exists with the workforce of the business itself. Many business use independent contractors for a variety of services. The company must be careful not misclassify an “employee” as an independent contractor. There are different status “tests” depending upon which governmental agency or judicial court is determining the case. It is actually possible for one agency to conclude the worker is an “employee” and another agency concluding the same worker to be an “independent contractor” while using the exact same set of facts!
The consequences for misclassification are very serious and expensive. They include compensation reimbursement, payment of taxes, penalties, interest and attorney’s fees which have the potential to put a company out of business. Anastasi Law Firm can help business owners minimize the risks of misclassification through proactive planning, counsel based on significant experience and proper legal structuring. Do not underestimate the importance of proper classification of workers as either true employees or true independent contractors. Independent contractors are not just a label. Do not try to save money by classifying a worker as a 1099 independent contactor without first understand the government tests.
Common Law Test for Independent Contractor
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
IRS 20 Factor Test for Independent Contractor
- Level of instruction
- Amount of training
- Degree of business integration
- Extent of personal services
- Control of assistants
- Continuity of relationship
- Flexibility of schedule
- Demands for full time work
- Need for on-site services
- Sequence of work
- Requirements for reports
- Method of payment
- Payment of business or travel expenses
- Provision of tools and materials
- Investment in facilities
- Realization of profit or loss
- Work for multiple companies
- Availability to public
- Control over discharge
- Right of termination
Economic Realities Test for Independent Contractor
- Extent of control over the details of the work (supervision)
- Extent of control over hours of the work
- Distinct occupation or business contracted?
- Industry practice
- Special skills required
- Who supplies the tools and instrumentalities?
- Who hires assistants?
- Full time hours?
- Length of time employed
- Method of payment (time or project)
- Is the work part of company’s regular business?
- Intent of the parties
- Location of the work
- Is the principal a business?
California EDD Test for Independent Contractor:
- Works off premises
- Replaces another independent contractor
- Job is not full time
- Company pays by the job
- Independent contractor provides equipment, space, and supplies
- No regular meetings with company employees
- Performs under independent contractor business name
- Independent contractor engages in other business while working for company
- Independent contractor was not terminated…ended by contract
California Labor Commissioner Test
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)
Serious Consequences for Misclassification:
Federal Taxes: Income tax payable by employee; FICA taxes (medicare & social security); FUTA payment taxes; Penalties for not filing W-2; Penalties on unpaid taxes; Penalties for each social security number not obtained; Interest on unpaid taxes; and potential for fraud, negligence or other findings or fines.
California Taxes: Income taxes payable by employee; Disability insurance; Unemployment insurance; State job training; Interest on unpaid taxes; and Penalties and potential imprisonment.
Worker’s Compensation: Stop work order; Worker’s Compensation assessment equal to employer and work contributions estimates; Time lost; Penalties; Payment of all medical expenses and separate civil action; Knowing failure to secure workers compensation payment is a misdemeanor.
Wage & Hour Law: Unpaid minimum wage and/or overtime & interest; Liquidated damages in an equal amount; Attorney’s fees; Meal and rest period premiums; Expense reimbursement claims; Penalties waiting time and pay stub.
Employee Rights: Discrimination, Harassment, Retaliation, Disability Accommodation, Medical and Family Leave laws — Back pay and benefits; Front pay and benefits; Emotional distress damages; Punitive damages; Attorney’s fees
Immigration: Fines & penalties for failure to file I-9
Pension and other Benefit Plans: Pension plan payment of 401k deferrals and matching contributions; Health premiums that should have been paid; Employee stock purchase/option plans; Lost bonus/awards given to other employees.
Respondeat Superior Liability: Employer responsible for tort (negligence) damages caused by worker.
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Contact us today to set up a Free Consultation (20 minutes) either in our office or over the phone. In the San Jose metro area, call us at 408.292.2606. In the Santa Cruz area, call us at 831.475.0771.