TO BE OR NOT TO BE? THE AGE OLD ISSUE OF INDEPENDENT CONTRACTORS VS. EMPLOYEES
(or what every business person should know about the subject of independent contractor status)
For as long as this author can remember there has been and continues to be an issue as to whether someone providing services for you (personally) or more importantly for your business, are classified as an employee or as an independent contractor.
Many people over the years ( and this continues as of the writing of this article as I have recently had a client run into these issues squarely with his workers compensation carrier) have tried to classify people who are working for them as independent contractors versus as employees.
Why is there such a push or desire on the part of Businesses to classify persons working for them as independent contractors?
That answer is easy as if an employee, then of course you have all of the added ‘employee expenses’ of that person, i.e. workers compensation insurance; all of the Fica , futa, sdi, fica etc. social security contributions and now the ‘affordable health care’costs of the same;
whereas if someone is truly an independent contractor you, the employer, simply have their cost of service whether it is $20 per hour or etc. So, the cost savings can be huge, but the exposure to the business/ and business owner for an error in classification of such workers is VAST AND THAT IS AN UNDERSTATEMENT!!!!!!
Who are the inquiring parties relative to these classifications? I.e. who is going to come after you for unpaid workmen’s comp. premiums; unpaid employment taxes and contributions to Federal and State employment taxes? Yes you guessed it , see below:
- INTERNAL REVENUE SERVICE (IRS)
- FRANCHISE TAX BOARD (FTB)
- EMPLOYMENT DEVELOPMENT DEPT-CALIFORNIA
- WORKERS COMPENSATION CARRIER
- THIRD PARTY CLAIMAINTS FOR ANY ALLEGED TORTIOUS ACTIVITIES OF THE ‘INDEPENDENT CONTRTACTORS
So, one can see that there are several possible adversarial settings into which, you the business person might be invited if you have crossed this ‘Barrier Reef’ of classification in the wrong fashion.
This arena, i.e. people attempting to try to classify their employees as independent contractors has become such a hot issue that the Employment Development and the Internal Revenue have sections of their website which set forth the criteria that they will look at when trying to determine as to whether or not they agree with your classifying of these people as independent contractors.</p
REVIEW OF THE KEY COMPONENTS OF BEING AN INDEPENDENT CONTRACTOR
So, really, what is the difference between an independent contractor and an employee?</p
This writer has reviewed the IRS website in multiple spots; the Small Business Administration website in several references, and the State of California Employment Development Department websites to attempt to gain insight to this determination. </p
Truly, no one takes a black and white position but rather say that it all depends upon this or that etc.</p
For instance, at the SBA website, the suggest the following:</p
- Operates under a business name;
- Has his/her own employees
- Maintains a separate business checking account
- Advertises his/her business services
- Invoices for work completed
- has more than one client
- Has own tools and sets own hours
- Keeps business records;
As to an Employee:
- Performs duties dictated or controlled by others;
- Is given training for work to be done
- Works for only one employer
WHAT IS ALL OF THE FUSS ABOUT? WHY DOES IT MATTER?
Hopefully by reading this article, and if necessary, consulting our offices, or another attorney who is competent in this area of practice, you and your business will be able to avoid a dispute over classification of your business’s workers, with either the IRS, State Franchise Tax Board; EDD; or the Board of Industrial Relations (workman compensation board) and or your own workmen’s compensation insurance company.
If your ‘Independent Contractor’ individual is reclassified by one of the above agencies such an event could result in anyone or all of the following:
Reimbursement of the individual for wages you should have paid them under the Fair Labor Standards Act, including overtime and minimum wages;
Pay back taxes and penalties for federal and state income taxes, Social Security, Medicare and unemployment;
Pay any misclassified injured employees workers’ compensation benefits;
Provide employee benefits, including health insurance, retirement etc.
The State of California Agencies which are most involved with a determination of independent contractor status are the Employment Development Department (EDD) and the Division of Labor Standards Enforcement (DLSE) which is concerned with whether the wage , hour, and workers compensation laws apply.
The DLSE starts with a presumption that the worker is an employee under Labor Code Sec. 3357. This is a rebuttable presumption so ultimately the determination is left to a decision based upon several factors. The DLSE applies a ‘multi-factor’ or ‘economic realities’ test adopted from the California Supreme Court Case styled , S&G.Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341. The most significant factor to be considered is whether the person to who service is rendered 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 which come into play in the analysis are as follows:
- Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
- Whether or not the work is 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; and 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.
In sum, in this writer’s opinion the entire matter is what Canadian’s would call a ‘dog’s breakfast’ , the idea being that the determination is a ‘crap shoot’ , tough call, and if you guess wrong there are, or can be far reaching ramifications.
If an employer wanted to hedge his or her bet they could file a Form SS-8 with the Internal Revenue Service- either filed by the business or the worker;
The IRS will review the facts and circumstances and officially determine the worker’s status. Be aware that it can take at least six months to get a determination, but particularly a business that continues to hire the same type of workers to perform particular services may want to consider filing the Form SS-8.
In sum, the determination as to whether a particular worker for business is an independent contractor or an employee could very well be a pivotal determination especially if the business guesses wrong and is later involved in an audit with either the IRS, the State Employment Development Department (or similar bureau depending upon the State in which the hiring occurs), and if green turns to brown the ultimate decision by a Trier of fact could have incredibly important financial impact on the subject business.
The within article is not legal advice but simply a discussion paper on an incredibly important subject to any business which utilizes or is thinking about utilizing a work force which the business wants to characterize as ‘independent contractors’.
Thus, obtaining legal advice from your lawyers on these issues would be some of the best spent legal fees that the subject business has incurred.