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Contractor
Status Scrutinized
Misclassifying employees, willful or not, could cost you.
Business owners blame unclear definitions
Independent contractor or employee?
Making the call can be confusing for
small-business owners. Making the wrong decision, on purpose or by mistake,
can be costly.
In California, the chances of getting busted are growing as the state
cracks down on businesses that wrongly claim employees are independent
contractors and, as a result, not subject to a slew of taxes and labor
laws.
The number of state audits and investigations of businesses climbed to
5,706 in the fiscal year ended June 30, up 54% over three years, according
to state data.
Each year, about half of those checks resulted in misclassification penalties,
the data showed. Last year, the state collected back charges and fines
of $163.6 million, up 30.4% from fiscal 2005.
Small-business owners blame unclear rules.
"There is massive confusion over what is an independent contractor," said
Scott Hauge, president of Small Business California, an advocacy group, and
owner of CAL Insurance & Associates Inc. in San Francisco.
Government officials and labor groups say some business owners knowingly
tag employees as independent contractors to avoid paying payroll taxes,
workers' compensation insurance premiums and overtime pay and skip out
on other employee costs and labor laws.
In his latest attempt to fix the problem, which has grown along with
the increasing designation of workers as independent contractors, state
Sen. Alex Padilla (D-Pacoima) has introduced a bill that would require
any person using an independent contractor to provide information from
the state Employment Development Department at the time of a work agreement.
Senate Bill 1490 would direct the EDD to develop forms that would notify
the person that he or she has been hired as an independent contractor.
It would include the criteria the agency uses to classify independent
contractors. And it would explain how the person could contact the EDD
to determine whether the independent contractor status is correct.
"The problem is misclassification, willful in a lot of cases of employers
classifying workers as independent contractors to save money, to cut corners," Padilla
said. "Not only is it not fair to those employees, it's also not fair
to the businesses that play by the rules."
Generally, if work done by a person is under the control of the employer,
then that person is considered an employee. California employers reported
2.6 million independent contractors in 2005, the latest data available.
"The independent contractor criteria are spelled out pretty clearly in
the code in California," Padilla said. "The biggest test boils down
to the smell test: How much control is there about how work will get done?
. . . There are several court rulings and precedents that are in place for
reference."
The bill, which was approved this month by the labor committee of which
Padilla is a member, is now in the appropriations committee. The proposed
legislation also would require a business to keep a list of its independent
contractors for at least two years or face a $500 civil penalty and the
possibility of a misdemeanor charge.
Businesses already have to notify the state when they take on an independent
contractor.
Sponsored by the California Labor Federation AFL-CIO, the bill follows
Padilla's attempt last year to pass Senate Bill 622, which would have
hiked penalties for misclassification. Gov. Arnold Schwarzenegger vetoed
it.
Many small-business owners would welcome a clarification of the rules,
advocate Hauge said.
"Is this going to conform to whatever the Franchise Tax Board says is
an independent contractor? To what the IRS says?" he asked.
Hauge's small business was audited a number of years ago, he said, and
had to convince the state auditor that the company's coffee service provider
as well as its insurance vendor, the behemoth Hartford, were not employees.
The dividing line isn't always clear.
As the state's Industrial Relations Department website notes, there is
no widely accepted definition of an independent contractor. There also
are a number of state and federal agencies involved with determining
who is an independent contractor, according to the website, including
the EDD, which collects employer-related taxes; the Labor Standards Enforcement
division; the Franchise Tax Board; the Workers' Compensation division;
and the Contractors State Licensing Board.
Agencies might apply different tests or laws to the same situation so "it
is possible that the same individual may be considered an employee for
purposes of one law and an independent contractor under another law," the
site stated.
At least one small-business advocate doesn't like the bill's paperwork
requirement and the record-keeping penalty.
"It's ridiculous. It's requiring employers to hand out a piece of paper
explaining what an independent contractor is, to independent contractors," said
Tom Martin, executive director of the Los Angeles-based Small Manufacturers
Assn. "We have a hard enough time keeping our doors open and now they
want us to do another piece of worthless paper, to do the government's job."
Even with the proposed changes, independent contractors would require
less paperwork than employees do, which is partly why they cost less
for businesses to use, said Padilla, who believes contractors have a
valid place in the workforce, as long as the designation is not misused
to give a business an unfair cost advantage.
"A level playing field," Padilla said, "is in everybody's interest."
Source: Los Angeles Times
April 21, 2008
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