New California Law imposes hefty civil penalties for employers who willfully misclassify workers as independent contractors. Faced with high payroll and workers’ compensation costs, many California businesses are increasingly tempted to hire part time workers as independent contractors, or even to reclassify existing employees as independent contractors. Effective January 1, 2012, California employers face stiff penalties with fines up to $10,000 for the first violation and $25,000 for each repeat violation for “voluntarily and knowingly” misclassifying workers as independent contractors. Many employers in California (studies indicate as high as 30%) have ignored the stringent legal requirements to properly classify workers as employees vs independent contractors to save money, payroll taxes, workers compensation insurance and benefits. California Senate Bill 459 greatly steps up the enforcement efforts to eliminate blatant misclassification of workers.
Employers need to exercise great caution in doing so, since employers who misclassify employees as independent contractors may find themselves liable for paying workers’ compensation benefits out of their own pockets, paying employment taxes, or providing retroactive benefits, such as vacation pay and retirement plan contributions to a misclassified worker, together with hefty penalties and interest payments. In an extreme case, if an employee suffers a workplace injury while the employer is uninsured for workers’ compensation (for example, because the employer has classified its entire staff as independent contractors and has no workers’ compensation coverage), the employer can be fined up to $100,000. The owners of the company can be held personally liable for this fine, together with any workers’ compensation benefits paid to the injured worker, even if the employer is a corporation. It is important to remember that in any California workers’ compensation action, the worker is legally presumed to be an employee and the employer has the evidentiary burden of proving that the worker meets the legal requirements for independent contractors.
Unfortunately, there is no single, clear-cut test to determine whether a worker is an independent contractor or an employee. Although California applies its own test, it is still useful to refer to the IRS’ list of 20 factors to determine a worker’s status, which is available in IRS Publication 15-A, Employer’s Supplemental Tax Guide on the IRS Web site at www.irs.gov. While no single factor is determinative, according to the IRS, the following are characteristics of independent contractors: setting their own work hours; furnishing their own tools; not receiving training from the hiring firm; working for more than one firm at a time; being paid by the job rather than by the hour; not providing progress reports; making their services available to the general public; and paying for their own business and travel expenses. California also places emphasis on whether a worker has a substantial investment in his or her business and has a legitimate opportunity to make a profit (or loss) from the operation of the business based upon his or her skills. The level of control over the worker’s activities, i.e., who exercises it and how, is a key factor.
The bottom line is that the test for establishing whether a worker is an employee or independent contractor under California law is complicated. Senate Bill 459 does not contain language in how to establish a safe harbor in deciding who qualifies for independent status. Therefore, California businesses are left in the dark on this and must look at each worker on a case by case basis. You could also review the topic on the California websitehttp://www.dir.ca.gov/dlse/faq_independentcontractor.html