Attention Business Owners:
Do you have any independent contractors (IC) doing work for your company? Ask yourself honestly, is the independent contractor real or just a label? In the legal system, merely labeling a person IC if often spelled: L I A B I L I T Y. Just because “everyone is doing it” does not make it legal.
Today, one of the most litigated case types in California is IC misclassification. It is what the military would call a “target rich environment”. The IRS has converted 100,000 internal processors to field agents focused on Small Businesses. Why? The Government has found IC and tax audits of Small Businesses tends to be very…profitable.
The business owner has the burden to prove a worker is a real IC. How? Legal “Tests” are used to determine IC status. Unfortunately, there are numerous tests involving a multitude of factors and subjective factual analysis. The Internal Revenue Service (IRS), the Employment Development Department (EDD), Division of Labor Standards Enforcement (DLSE), Franchise Tax Board (FTB), the Division of Workers’ Compensation (DWC), the Contractors State Licensing Board (CSLB) and lawyers in Civil Actions, all use slightly different tests when evaluating IC/employee status.
The State of California, Dept of Industrial Relations admits, “it is possible that the same individual may be considered an employee for purposes of one law and an independent contractor under another law.”
The consequences for misclassification are huge and include, payment of the worker’s Federal and State income tax that should have been withheld, unemployment taxes, overtime, meal periods, 100% liability for Worker’s Comp claim, liability for worker’s negligence, interest, fines, penalties, and in some cases, imprisonment.
Seriously, Independent Contractor status classification can be high-risk decision process. Is it worth it? Can you afford to be wrong? Because the potential liabilities and penalties are significant, each working relationship should be thoroughly researched and analyzed, preferably before it is established. Do not wait until it is too late. Litigation is too expensive. Be proactive. It is your business. Protect it.