Misclassifying Employees as Independent Contractors
The IRS is highly concerned with employers categorizing employees as private contractors, since this is a violation of San Diego employment law. Private contractors receive Form 1099 at the end of the year for tax purposes, while employees receive Form W-2. Private contractors work independently and are not an immediate part of your business or workplace. A worker is considered a private contractor if a supervisor has control over completed work, but not over how and when the work is done. If employees are being given assignments and working on them from home, they should most likely be classified as independent contractors. If employees are going into work every day, following an office dress code, being told what to do and where to sit, they are not private contractors.
Keep in mind that even if an employer has a worker sign a contract in which the employee agrees to work and be paid as an independent contractor, this agreement is virtually meaningless in the eyes of a trial court, the Labor Commissioner, and IRS, who will probe deeper to determine whether or not an employee has actually been misclassified. A worker’s willingness to be misclassified is irrelevant when it comes to punishments employers may face.
Employers who violate San Diego employment law by misclassifying workers can face significant punishment. While penalties are especially severe for employers who knowingly misclassify employees as independent contractors, those who do so accidentally can still face considerable repercussions.
Recognizing Misclassification of 1099 Contractors
When determining whether a worker has been misclassified, the IRS examines several factors regarding the relationship between the employer and the worker. If the IRS concludes that the worker has been misclassified as an independent contractor, the employer faces severe penalties for harming the worker, avoiding taxation, and shirking important insurance payments. Several factors used by the IRS to determine 1099 contractor misclassification include the following:
- Financial influence: Independent contractors are rarely paid a regular, weekly wage. Similarly, they have usually made a financial investment in their own business, through which they offer services to employers. If these factors are absent, a worker is most likely an employee, not an 1099 contractor.
- Behavioral influence: Factors such as workplace, work time, work attire, training for work to be completed, and where the worker obtains tools required to complete a job influences whether or not a worker is an independent contractor. If the employer controls these factors, the worker is most likely an employee, and not a 1099 contractor.
- Duration of work: Independent contractors usually take on specific, finite projects. Meanwhile, employees aren’t often hired with a clearly defined end date. Instead, they receive new assignments as work is completed. Consult your San Diego employment lawyer to determine how duration of work affects your situation or the status of your workers, as some private contractors may receive ongoing assignments.
- Nature of work: Employees usually complete work that is essential to the functioning of the business, rather than providing supplemental labor, which is more often the role of an independent contractor. For example, delivery drivers for a microbrewery generally would not be considered 1099 contractors, since, although they are not working in a traditional, controlled office setting, their work is essential to the functioning of the company. Meanwhile, a freelance writer who creates advertising content for a business would be more likely considered a 1099 contractor, since the services he or she provides are supplementary, and not essential to day-to-day functioning.
- Relationship between employer and worker: If a worker is free to pursue other jobs in addition to working for the employer in question, then he or she may be an independent contractor. However, if the employer provides the sole source of income for the worker, than he or she may be considered an employee.
Determining whether a worker is an independent contractor can be confusing. Employers who are unsure of how to classify workers are strongly advised to consult a San Diego employment lawyer, since even accidentally misclassifying an employee as a 1099 contractor can result in severe punishment. Similarly, if you are a worker and feel you may have been misclassified, save yourself time and money before filing a suit by consulting a San Diego labor lawyer to determine your legal status.
Misclassification and the IRS
The IRS has reported through the Government Accountability Office (GAO) that employers illegally escape paying millions of dollars in taxes each year by violating labor law and misclassifying employees as 1099 contractors. The IRS is serious about cracking down on this offense, enacting severe penalties and increasing the frequency with which businesses are audited. In fact, in 2005 the IRS Commissioner announced that the number of audits of small businesses had risen by about 10,000, over a 100 percent increase since 2004. The Obama administration is pushing legislation at the federal and state level, bolstering penalties and increasing supervision of employee classification, increasing the likelihood that employers who violate San Diego employment law and misclassify employees as private contractors will be caught and punished.
Some employers break San Diego labor law by misclassifying employees as private contractors for tax purposes. Such misclassification saves money by allowing the employer to avoid paying unemployment tax and other federal taxes. However, this misclassification is illegal, and an employer that is found guilty of breaking San Diego employment law in this area faces significant fines and other penalties enacted by the government.
Misclassifying as a 1099 Contractor: Impact on Workers
If you are an employee that has been misclassified as an independent contractor, you can be hurt in several ways. First, taxes will not be withheld from your paycheck, meaning you will owe the IRS money at the end of the year. This can complicate your financial planning, and make filing your tax return more difficult and complicated, putting you at an increased risk of making an error and being audited.
If your employer fires you, you are likely to be ineligible for unemployment benefits, since your employer has not been paying unemployment tax on your behalf. Your medicare and Social Security credit will also be damaged, since you will have been working for a certain period of time without paying taxes into these funds.
You may be denied additional rights if you are illegally misclassified as an independent contractor in San Diego. The National Labor Relations Act determines that 1099 contractors are not employees. Therefore, if your employer violates San Diego labor law by classifying you as an independent contractor, you cannot be represented by a union, and you have no right to negotiate with your employer regarding compensation or other factors concerning your work. Overall, violation of San Diego labor law through misclassification as a private contractor can create significant problems for a worker.
Example Cases: Misclassification as Independent Contractor
Examining example cases can improve general understanding of what employees stand to gain if they win a case after being misclassified as an independent contractor, and what employers stand to lose if they violate this area of San Diego labor law. In the case Estrada v. FedEx, drivers misclassified as 1099 contractors received collective compensation of $5 million, and the company was required to pay an additional $13 million to the labor lawyers representing the drivers. In the case Vizcaino v. Microsoft, the employer settled with the employee for $97 million. Employers also faced additional expenses in the form of back-taxes paid to the IRS, which can be even greater than the cost of a settlement.
Whether you are an employee who has been misclassified as a 1099 contractor, or an employer who is being charged with misclassification, you will require the services of a San Diego employment lawyer to argue your case and help you navigate the complexities of San Diego labor law.
Possible Outcomes of Reclassification
If the IRS reclassifies individuals who were previously misclassified as independent contractors, recognizing them instead as employees, employers may not only be liable for violating San Diego labor law, they will likely have to make amends for ignoring certain employee rights.
Title VII of the Civil Rights Act of 1964 protects workers from discrimination due to religion, race, national origin, appearance, or gender, or for their association with others based on these criteria. 1099 contractors are not generally protected by Title VII of the Civil Rights Act of 1964. However, if the IRS determines that an employer is in violating of San Diego employment law and reclassifies independent contractors as employees, the employer may be liable under VII if any discrimination has occurred.
Employees can request time off through the Family Medical Leave Act (FMLA). 1099 contractors generally cannot benefit from the FMLA. However, if an employer has misclassified an employee as a private contractor and denied him or her leave, the employer may be liable under FMLA, as well as under violation of San Diego labor law, once the individual is reclassified as an employee.
The Federal Wage and Hour Law (FLSA) determines national minimum wage and guidelines for overtime compensation. Additional state laws also mandate wages and overtime. The FLSA generally does not protect independent contractors. However, if a 1099 contractor is reclassified as an employee, and the employer is found guilty of violating wage standards or failing to compensate for overtime, the employer can be required to repay all withheld wages, in addition to potential interest and waiting penalties, to the employee for as long as the individual was misclassified.
Additional areas exist in which employee rights can be violated through misclassification, incurring increasingly severe penalties for the employer. Consult a San Diego employment lawyer if you are a worker who has been misclassified as an independent contractor, and have been denied rights generally granted to employees. You should also seek counsel from a San Diego labor lawyer if you are an employer who is facing charges of misclassification and violation of employee rights.
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