Independent Contractors Vital, Growing Source of California Economic Strength

Independent contractors are a vital and growing source of strength in California’s economy, according to a new report co-sponsored by the California Foundation for Commerce and Education (CFCE).

Attempts to rein in independent contractors through regulations would have a harmful effect on California’s economic productivity and employment, the study concluded.

Independent contracting is a business arrangement in which a client firm (or government) will contract with, usually, a small business or individual to perform work that might otherwise be performed in-house by staff employees.

Labor unions in California and elsewhere criticize these arrangements and attempt to apply regulations on record-keeping and taxation that would reduce the incentive to employ or become an independent contractor.

The study, prepared by Philip J. Romero, Ph.D., professor of finance at the University of Oregon and former chief economist for Gov. Pete Wilson, found that independent contractors are an important source of economic strength in California, and that arguments aimed at undermining independent contracting are based on myth, not credible data.

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IRS Creates Voluntary Settlement Program



In September, the Internal Revenue Service (IRS) launched a new program to offer some employers partial relief from federal employment taxes. The program is available to those employers who currently treat their workers, or a class or group of workers, as independent contractors or other nonemployees.

Through the Voluntary Classification Settlement Program (VCSP), eligible employers can obtain significant relief from past federal payroll taxes (and penalties and interest) if the employers voluntarily reclassify independent contractors as employees, and treat those misclassified workers as employees for future tax periods.

Proper classification of workers can be difficult because different agencies apply different tests to determine whether the worker is an independent contractor. Improper classification of a worker as an independent contractor can lead to substantial financial damages for the employer, including back taxes, penalties and interest.

The IRS finds wrongful classification in up to 90 percent of firms audited, and estimates the employment taxes not collected because of misclassification at $35 billion per year. The IRS, in conjunction with the federal Department of Labor (DOL), has increased efforts to stop worker misclassification, and the agencies have agreed to share information relating to worker classification issues.

This past year, the IRS announced a three-year plan to increase audits of independent contractors, and the DOL also stepped up enforcement efforts, asking for $15,223,000 and 107 employees for an additional 3,250 misclassification investigations in 2012.

To be eligible for the VCSP, the company must have:

• Consistently have treated workers in the past as nonemployees
• Filed all required 1099 tax forms for the workers for the previous three years
• Not be under an IRS audit
• Not be under an audit by the Department of Labor (DOL) or any state agency relating to the proper classification of these workers

The program allows employers to get into compliance by making a “minimal” payment covering past payroll tax obligations, rather than being subjected to a potential audit. According to the IRS, employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified worker for the past year. No interest or penalties will be owed, and the employers will not be audited on payroll taxes related to these workers for prior years.

Given this increased enforcement, companies may want to consider the new settlement initiative to address potential federal tax liability. However, reclassification may have other consequences. 

For example, wages and penalties could potentially be owed for wage and hour violations resulting from the misclassification, such as missed meal and rest periods or overtime.  Thus, employers should seek legal counsel prior to deciding to enter into the new IRS settlement program.

Gail Cecchettini Whaley, CalChamber Employment Law Editor/Staff Counsel

CalChamber customers can watch this webinar to learn how to properly make the independent contractor classification. Our employment law experts discuss the legal definition of “independent contractor” and common mistakes that employers make when classifying workers as independent contractors.

 

 

Flurry of Employment Bills Signed Over the Weekend

California Gov. Jerry Brown had until midnight October 9, 2011, to sign or veto bills before him.  He used every last minute, signing bills right up to the deadline.

In the past few days, Gov. Brown signed several important employment-related bills into law:

• AB 22: Prohibits employers from being able to use credit reports for applicant or employment purposes, except in limited circumstances.
•  SB 459: Provides new penalties for “willfully” misclassifying independent contractors. Imposes joint liability on non-attorney outside consultants who knowingly advise an employer to treat an individual as an independent contractor to avoid employee status.
• AB 1396: Requires written commission agreements. Employers must comply by January 1, 2013.
• SB 299: Makes it an unlawful employment practice to refuse to maintain and pay for coverage for an employee who is on pregnancy disability leave under the same conditions that coverage would have been provided if the employee had continued in employment during the PDL leave. Look for upcoming newsletters for an in-depth explanation of what this bill means for your existing policies.
• AB 887: Further defines “gender” under the Fair Employment and Housing Act to include both gender identity and “gender expression.” Gender expression is defined as “a person’s gender-related appearance and behavior whether or not stereotypically associated with the person’s assigned sex at birth.”  This definition is consistent with existing law.

Gov. Brown vetoed AB 325, a CalChamber “job killer” bill, which would have required California businesses to provide up to three days of unpaid bereavement leave.

We will discuss new employment-related legislation in more detail in the upcoming issues of HRCalifornia Extra and California Employer Update. Stay tuned …

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Gail Cecchettini Whaley, CalChamber Employment Law Editor/Staff Counsel

Fact or Fiction? “Independent Contractor” Has the Same Meaning for All Government Agencies

Fiction: One government agency’s determination that an employee is an independent contractor for one purpose does not mean that a different government agency will reach the same conclusion.

From the Division of Labor Standards Enforcement:

“The state agencies most involved with the determination of independent contractor status are the Employment Development Department (EDD), which is concerned with employment-related taxes, and the Division of Labor Standards Enforcement (DLSE), which is concerned with whether the wage, hour and workers’ compensation insurance laws apply. There are other agencies, such as the Franchise Tax Board (FTB), Division of Workers’ Compensation (DWC), and the Contractors State Licensing Board (CSLB), that also have regulations or requirements concerning independent contractors.

Since different laws may be involved in a particular situation, such as a termination of employment, it is possible that the same individual may be considered an employee for purposes of one law and an independent contractor under another law. Because the potential liabilities and penalties are significant if an individual is treated as an independent contractor and later found to be an employee, each working relationship should be thoroughly researched and analyzed before it is established.”

For more information on defining who and who is not an independent contractor, sign up for CalChamber’s webinar on Determining Independent Contractor Status, to be held September 8, 2011.

Gail Cecchettini Whaley, CalChamber Employment Law Editor/Staff Counsel

 

Government Cracks Down on Misclassified Independent Contractors

As both federal and state officials look for ways to combat massive budget deficits, they're turning their watchful eyes to businesses that use independent contractors. In a recent article, the NY Times shed further light on the increased scrutiny businesses might face at both the state and federal levels, pointing out that "President Obama's 2010 budget assumes that the federal crackdown will yield $7 billion over 10 years." The U.S. intends to accomplish the revenue increase by hiring 100 more enforcement staff to increase investigations, but the Internal Revenue Service has already started auditing approximately 6,000 companies to see whether they have misclassified employees as independent contractors.

California businesses have much to be wary of from state officials. The consequences of misclassifying an employee as an independent contractor in a wage/hour context include liability for unpaid wages for a period of as much as four years, including potential overtime pay. If employee status is found, the failure to pay all wages due every pay period may result in penalties of $100 to $200 per employee per pay period, and as much as 25 percent of the wages not paid to each employee for each pay period. California Attorney General Jerry Brown last year won a $13 million judgment against two companies that had, according to a court, misclassified 300 janitors, depriving the state of significant payroll taxes.

HR California members can access in-depth information and tools to help them comply with the law regarding independent contractors.