Avoid Employment Misclassification Problems
Before determining the services and exchange between yourself and a hired worker, employers should determine the nature of their relationship with the worker. The classification of a worker determines both the valid tax procedure and employer-provided service obligations. The following four worker classifications are the primary types of workers:
- An independent contractor
- An employee (common-law employee)
- A statutory employee
- A statutory nonemployee
The Internal Revenue Service provides three common rules for classifying workers; however, businesses must weigh the three determinants as a whole rather than individually. The following common rules determine the nature of the employment:
- Does the company have the right to control what the worker does and how the worker does his or her job?
- Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors may indicate that the worker is an independent contractor. It is common practice for employers to misclassify workers to avoid the costs of workers compensation, overtime pay and other employer obligations associated with employment of workers classified as employees. The most common form of this misclassification occurs when employers label workers as independent contractors rather than employees. The indirect incentives of labeling an employee an independent contractor often prompt illegal misclassification and thus future financial and legal consequences for the employer. These consequences include:
- Liability for overtime premium, meal period pay, and other remedies available to employees under the Labor Code and Orders of the Industrial Welfare Commission;
- Exposure for tort liability for injuries suffered by employees when workers compensation insurance is not secured;
- Exposure for unfair business practices; and
- Tax liability and penalties;
All California businesses are thus advised by the California Department of Industrial Relations to consider seeking legal advice when employing independent contractors to regularly perform work that is integral to the business of the company. For more information regarding labor laws and employment misclassifications, or to schedule a personal consultation, contact us today. Our professional insight and objective viewpoints might just save your company money.