Correctly determining whether your workers are employees or independent contractors is a critical step before hiring as well as periodically as their jobs change. Classifying an employee as an independent contractor can be very costly and include back wages, taxes, interest, and severe penalties.
The Difference Between Classifications
If you have employees on staff, you are required to withhold income taxes, pay Social Security and Medicare taxes, pay unemployment taxes on wages and provider worker’s compensation insurance for the employee. In contrast, if you utilize the services of independent contractors, none of these are required.
Unfortunately, there are many gray areas in making this determination, which requires a fact-specific analysis. In California, the Division of Labor Standards Enforcement, or DLSE, begins with the presumption that every worker is an employee, so the burden is on employers to refute this presumption if they wish to classify a worker as an independent contractor.
The Economic Realities Test
To begin the analysis, California courts require employers to utilize the “economic realities test.” In applying this test, the most significant factor to be considered is whether the employer has the control or the right to control the worker both as to the work done and the manner and means in which it is performed. See our previous blog here for more information on this test.
An experienced employment attorney or business attorney can help you perform this analysis and make a sound determination by reviewing each worker’s job description and applying the most recent legal precedent to the worker’s particular situation. Facts which support the classification of a worker as an independent contractor include situations where the worker has a business that is different from yours, the work performed is not part of your regular business, the worker supplies the tools used to perform their job, the worker performs their job independently, and the services provides require specialized skills. Your business attorney may alert you to other factors which are relevant to your particular situation.
Many business owners believe that the presence of an established agreement specifically stating that the individual is an independent contractor is controlling. However, California courts have found such an agreement all but irrelevant. Similarly, issuing a 1099 form to the worker is also not determinative.
Your Next Step
Because so much is at stake in considering the proper classification of workers, it is essential to consult with a business attorney whenever you are considering hiring independent contractors. If the individual has been part of your organization for some time, ensuring you made the right choice at the outset is also important. An annual audit by a business attorney is highly recommended as well, since the roles of workers change over time due the changing needs of a business. The earlier you catch a mis-classification, the more you can mitigate the cost to your business.
Employment Law Attorneys
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