Labeling your workers as "independent contractors" may seem an appealing way to avoid certain operating costs, but many employers do not realize the dangers associated with misclassifying employees to save a few dollars in the short term.

EMPLOYEE OR INDEPENDENT CONTRACTOR? 

In California, there is a strong presumption that anyone performing work for your company is an employee.  Employers face a heavy legal burden when attempting to demonstrate that a worker has been properly classified as an independent contractor.  Adding to the confusion is that different agencies use different definitions to determine whether a worker is an employee or an independent contractor.

There are a number of factors that are weighed by the various agencies in determining whether a worker is actually an independent contractor.  The mere fact that an employer calls a worker an independent contractor is not determinative of the actual status of the worker.  This is true even where the worker specifically requests that he/she be treated as an independent contractor, and even if the request is spelled out in writing. 

MISCLASSIFICATION OF EMPLOYEES AS INDEPENDENT CONTRACTORS CAN HAVE MAJOR CONSEQUENCES

If you are treating your workers as independent contractors when they do not meet the stringent legal requirements necessary to justify this label, your business could be in jeopardy.  Among the legal problems you will face are:

• Investigations by DLSE and EDD for possible underpayment of minimum wage, overtime, and other wage and hour issues
• Investigations by California taxing authorities and the IRS for underpayment of employment taxes, improper withholdings from paychecks, etc.
• Major problems with worker's compensation claims by injured workers and claims for unemployment by terminated workers
• Potential lawsuits or threats of lawsuits from disgruntled or opportunistic workers who have been misclassified, for wages and benefits that should have been provided to them as employees
• Potential lawsuits or threats of lawsuits by business competitors, who see your misclassification of workers as giving you an unfair competitive advantage

If one of the above groups brings the misclassification issue up, there is a strong likelihood that all of the other groups will soon be asserting their own claims against your company.  If it is established that your workers have been misclassified, the fees, fines, and penalties can easily run into the tens of thousands of dollars.  Fortunately, the issue is avoidable, with a little bit of legal assistance .

THE BOTTOM LINE

The bottom line is that if you choose to label your workers as independent contractors, your classification had better be right.  If not, your business could be one impromptu audit or one worker complaint away from suffering a major financial blow.

 Navigato & Battin attorneys have walked many businesses through the employee/independent contractor classification issue, and will give you a frank assessment of your particular situation by applying the lengthy and complex list of factors used by various agencies to determine whether workers are truly independent contractors.  If you treat any workers as independent contractors or are considering doing so, it is essential to your business to make sure the label truly fits.  If you have any questions about the employee/independent contractor dilemma, please do not hesitate to contact us.