Determining whether your hired labor should be paid as employees or independent contractors has a major effect on your business’ bottom line. Employers may be tempted to treat this issue lightly, or to attempt to classify all hired labor as contractors in order to keep costs down (specifically, costs related to wage-hour laws and payroll taxes). However, specific rules govern whether your hired labor is an employee or contractor, and you must classify carefully and correctly.
Improperly characterizing an employee can have significant negative ramifications for you and your business. Not only can a misclassified worker be retroactively entitled to all of the protections that they would have had if they had been classified as an employee, such as overtime, timely payment of wages, reimbursement of expenses, and protection from discrimination — but the employer in error could also be subject to significant penalties imposed by the Internal Revenue Service (IRS), Employment Development Department (EDD), California Division of Labor Standards and Enforcement (DLSE), Franchise Tax Board (FTB), or Department of Industrial Relations (DIR).
The experienced employment attorneys of Bellatrix PC can help your business classify, document, and compensate your employees accurately, ensuring you stay compliant with the law and avoid being targeted by a lawsuit or IRS investigation. To start discussing your concerns and objectives in a private legal consultation, call Bellatrix PC at (800) 449-8992 today.
Penalties for Misclassifying Workers: Fines and Lawsuits
Some employers attempt to deliberately misclassify their workers in order to avoid providing costly employee benefits or paying payroll taxes. As a result, governing bodies such as those noted above frequently audit businesses to determine whether independent contractors are properly classified. The IRS aggressively investigates thousands of instances of suspected payroll tax fraud, tax evasion, and other tax crimes each year. Simply put, it is never prudent to gamble with your chances of being examined.
In addition to the dangers of triggering an IRS investigation, California employers who intentionally misclassify their employees face another legal and financial risk: employees who believe they have been misclassified can sue directly for wages, both in Superior Court and before the DLSE. Widespread or systematic workforce misclassification can even result in costly wage and hour class actions against the employer.
Furthermore, you may also lose workers’ compensation coverage when the insurance company realizes you have misclassified your employees. Insurance companies audit your workforce and base their premiums on the number of employees you have, and the salaries that you pay. Therefore, it is in your best interests to know whether your workers and contractors are properly classified — and to comply with all relevant laws accordingly.
The Difference Between Employees and Independent Contractors
Courts use different tests for classifying whether workers are employees or independent contractors, but there are some general principles and guidelines.
As opposed to employees, independent contractors are generally in business for themselves, and offer their services to a number of different companies. They often have specialized skills and control not only the outcome of their work, but also the means used to accomplish their work. They also control most of their own profit and loss decisions. For example, lawyers and accountants are commonly independent contractors.
Historically, courts have used the following factors to help make determinations in employee misclassification cases:
- Worker opportunity to share in profits and losses.
- How heavily the worker is invested in equipment and facilities.
- How much control the employer exerts over daily operations performed by the worker.
- Whether the relationship between employer and worker is permanent or temporary.
- To what degree services factor into the employer’s business.
- The dependency of the worker upon the employer for ongoing work.
- How heavily factors such as independence, planning, and personal discretion factor into the worker’s methods of operation.
If you have any doubts about whether members of your workforce are appropriately classified, you should speak with an employment lawyer with experience handling these sorts of cases. An ounce of prevention today can save you and your organization a massive legal headache tomorrow. Our business risk review service can help you identify and correct weaknesses and inaccuracies in your company’s employment policies, thereby minimizing your chance of exposure to litigation and subsequent fines.
Contact Our Business Attorneys
The attorneys of Bellatrix PC are experienced in giving advice and representing employers in disputes against their former employees alleging misclassification issues. We believe in helping employers save time, money, and unnecessary disruption to their daily operations through efficient, proactive efforts to classify their hired labor properly at the outset.
The knowledgeable legal team at Bellatrix PC can also handle all of your business’ day-to-day legal needs. By establishing an ongoing relationship with our firm, we can act as an outsourced general counsel for all of your company’s legal questions and regulatory concerns. Establishing a relationship with experienced counsel can ensure that when a conflict or lawsuit arises, your company will know where to turn for dependable legal advice.
To arrange for a confidential case evaluation, call Bellatrix PC at (800) 449-8992 right away. Our law offices are located in St. Louis, San Diego, and Riverside, CA. We consult with organizations nationwide.
I recently opened up a new mobile phone account for my business. The wireless company gave me the ability to buy an insane number of phone lines (like 50) without a deposit, for very little per month. I'm thinking about whether I should provide cell phones to my staff...
How useful is a condom that is never taken out of its box and wrapper? If you were the kind of person with enough forethought to buy a condom, you would probably want it to protect you from several things. But it would not be very useful to go through the trouble of...
Many good and generous employers want to share with their employees. The idea behind giving employees stock is a sound one. Employees who are owners may be more invested in the business's success. They may feel more appreciated. It could give them a sense of pride,...
Many employers in California know that certain employees are entitled to meal and rest breaks. But several years ago, there were multiple large class actions on the question of whether employers must "ensure" or merely "provide" breaks. In practice, what this question...