The old saying goes, “there are two things that you can’t avoid – death and taxes.”  Despite that sage advice, many employers, well intentioned though they may be, have attempted to save money by classifying employees as independent contractors, to avoid paying taxes.

However, just because a company hires a worker as an independent contractor does not make it so. In recent years, the U.S. Department of Labor, the California Department of Labor Standards Enforcement, and other agencies have made it increasingly clear that the definition of “independent contractor” is very narrow.  Moreover, the government has increased the risks for misclassification.

First, misclassifying an employee as an independent contractor may cause a company to end up owing  unpaid federal, state, and local income tax withholdings, Social Security and Medicare contributions, unpaid workers compensation premiums, and unpaid unemployment insurance premiums. On top of all of that, civil penalties for misclassification can be as high as $25,000 per misclassified employee.

The company could also be liable wage and hour violations, including for minimum wage, overtime, meal periods, and rest breaks, as well as additional interest, penalties, and if sued, attorneys’ fees. If a disgruntled employee sues, misclassification can be a very costly mistake, as often these type of lawsuits become class action cases, which are extremely costly to defend and settle.

How to not embrace the unavoidable?   The Department of Labor Standards Enforcement starts with the presumption that a worker is an employee. While different agencies have different tests, the most important factor is the “economic realities test,” which considers whether the employer controls or has the right to control the worker both as to the work done and the manner and means in which it is performed.

A worker is more likely an independent contractor if:

  1. The services provided by the worker are not part of the regular business of the company. (For example, a cleaning person that cleans an optometrist’s office could be an independent contractor. The receptionist would not.)
  2. The worker has a distinct business or occupation. (For example, a computer equipment specialist, who comes to fix the computer at the optometrist’s office.)
  3. The worker supplies the tools, instrumentalities, and location for the work.
  4. The worker’s services require a special skill.
  5. The worker has less supervision.
  6. The worker has the right to control the day-to-day details of his or her job.
  7. The length of time for which services are to be performed is discrete, rather than ongoing.
  8. The worker is paid a flat fee for the job, rather than by the hour.
  9. The worker’s opportunity for profit or loss depends on the workers’ managerial skill.
  10. The worker believes that he or she is an independent contractor. Even so, issuing a Form 1099 and entering into an independent contractor agreement will not make a worker an independent contractor if the other factors weigh in favor of finding that the worker is an employee.
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