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. This practice is becoming more and more common as business needs change.
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. On top of hefty penalties and interest payments, they may also need to pay employment taxes or provide retroactive benefits such as vacation pay and retirement plan contributions to a misclassified worker.
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.
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
- 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.
If you have any questions or comments about any of the points raised in this article, or require any assistance with independent contractor or employee issues please contact us online or call 866-454-2281 to schedule a consultation at our Irvine or Westlake Village offices.