Earlier this year California became the 12th state to enter into a Memorandum of Understanding (MOU) with the Department of Labor’s Wage and Hour Division, signifying that they will be working together to end the practice of misclassifying employees. In 2011, the Wage and Hour Division collected more than $5 million in back wages for minimum wage and overtime violations under FLSA (Fair Labor Standards Act) resulting from employees being misclassified as independent contractors, or otherwise not treated as employees.
Last year California passed Senate Bill 459 which imposes penalties of from $5,000-$25,000 for “willful misclassification” of an employee as an independent contractor. These fines are in addition to any employment taxes and insurance found owing.
Before you classify an individual as an “independent contractor” be sure you review the various resources available to avoid misclassification and the resulting costs and fines of doing so. California’s Employee Development Department’s (EDD) Employment Determination Guide provides a Worksheet on Employment Status that includes a battery of questions that will help you determine classification. The IRS uses 20 factors to evaluate the validity of independent contractor classifications:
- Level of instruction
- Amount of training
- Degree of business integration
- Extent of personal services
- Control of assistants
- Continuity of relationship
- Flexibility of schedule
- Demands for full-time work
- Need for on-site services
- Sequence of work
- requirements for reports
- Method of payment
- Payment of business or travel expenses
- Provision of tools and materials
- Investment in facilities
- Realization of profile or loss
- Work for multiple companies
- Availability to public
- Control over discharge
- Right of termination
More information about each of these factors is in the IRS publication. As always, consult with your tax advisor or an employment attorney for specific questions about classifications.
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