Don’t wait for Civil Litigation to learn your independent contractors are actually employees
The status of independent contractors is a complex matter which, if determined incorrectly, can lead to substantial financial penalties for business owners. The issue of independent contractors has been in the news lately thanks to companies like Uber, Lyft and Grub Hub that have disrupted the livery and restaurant industries. Unfortunately, as is often the case, laws have not caught up with technology and these issues will continue to arise.
Much of the law about worker status is decades and even centuries old, and present day controversies over these issues continue to arise. See, e.g., O’Connor v. Uber Techs., Inc., 82 F.Supp.3d 1133 (N.D.Cal. 2015); Cotter v. Lyft, Inc., 193 F.Supp.3d 1030 (N.D. Cal. 2016).
In addition to the IRS, businesses will need to review regulations and determinations made by their state labor department and franchise tax board. As an example, the following questions are offered by the California Employment Development Department to help determine employment classification:
1. Do you instruct or supervise the person while he or she is working?
2. Can the worker quit or be discharged (fired) at any time?
3. Is the work being performed part of your regular business?
4. Does the worker have a separately established business?
5. Is the worker free to make business decisions which affect his or her ability to profit from the work?
6. Does the individual have a substantial investment in their job which would subject him or her to a financial risk of loss?
Questions 7-13 are additional considerations in the determination process, although answering “Yes” to any one is not an indicator of employment classification one way or another.
7. Do you have employees who do the same type of work?
8. Do you furnish the tools, equipment, or supplies used to perform the work?
9. Is the work considered unskilled or semi-skilled labor?
10. Do you provide training for the worker?
11. Is the worker paid a fixed salary, an hourly wage, or based on a piece rate basis?
12. Did the worker previously perform the same or similar services for you as an employee?
13. Does the worker believe that he or she is an employee?
According to the CA EDD document, the following workers are most often misclassified:
• Construction workers
• Seasonal workers
• Short-term or “casual” workers
• Outside salespersons
Penalties for the Misclassification of Workers
The penalties to business owners for incorrectly classifying a worker as an independent contractor can be extensive. Here is a brief summary of the liabilities a business owner could be facing:
1. Federal Income Tax.
The amount the employer was supposed to withhold from their employee could double along with interest and penalties if the proper forms were not filed and taxes not paid.
2. Payroll Tax.
The IRS can hold the business owner or chief executive personally responsible for missing payments, including penalties and interest.
3. Unemployment Tax.
Depending on the state your business is located, you would owe the unemployment tax as well as penalties and interest.
Employers can be assessed a penalty equal to 20% of the employee’s share of the FICA tax. It can double to 40% if the IRS determines the misclassification was intentional. It doesn’t end there, however, additional penalties and interest can be levied for failure to file.
IRS – Independent Contractor (Self-Employed) or Employee?
IRS – Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding
OR – Oregon State’s “IRS 20 Factor Test for Independent Contractors”
CA – S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989)
CA – California Department of Industrial Relations – Misclassification of employees