INDEPENDENT CONTRACTOR MISCLASSIFICATION-INCREASED PENALTIES

Beginning January 1, 2012 California employers that willfully misclassify employees as independent contractors will be subject to fines of $5,000 to $25,000 per violation. These new penalties are in addition to any back taxes, penalties, and interest resulting from the misclassification. “Willful misclassification is defined as “avoiding employee status for an individual by voluntarily and knowingly misclassifying” the person. The extent of penalties assessed will be based on whether the employer is found to have engaged in a “pattern or practice” of such violations.

Unfortunately, the rules on determining employee vs independent contractor status do not make the determination cut and dry. An employment relationship exists if the person for whom the services are performed has the right to control and direct the individual who performs the services. Additionally, there are 20 common law factors that can be evaluated in making the determination.

Additional disciplinary action includes the requirement to post on the company’s website information about the misclassification which would be harmful to the company’s business. Licensed contractors will be reported to the Contractor’s License Board who will be required to take action against the licensee.

At the Federal level, the IRS has launched a new Voluntary Settlement Program. In exchange for agreeing to treat the class of workers as employees for future tax periods, the taxpayers who meet certain requirements will be required to pay a percentage of the employment taxes that would have been due on compensation paid to the workers for the most recent year without interest and penalties and will not be subject to a Federal employment tax audit with respect to worker classification of the workers being reclassified for prior years.

It is our opinion that those businesses with the greatest number workers being treated as independent contractors are at the greatest risk of examination. If you have been treating workers as independent contractors it would be a good idea to reevaluate your position to ensure you have a defensible position on your treatment. Call us if you would like a consultation.