Posted by: Professionals In Human Resources Association (PIHRA) | February 27, 2010

How To Avoid Liability – Get the Independent Contractor Classification Correct

There are hundreds of requirements that employers must be weary of when managing their employees. One area often overlooked by employers is the misclassification of employees as independent contractors. Misclassification of independent contractors implicates federal and state tax issues, unemployment benefits, workers’ compensation, participation rights in employee benefits plans and potential wage and hour violations under state and federal law.

There are numerous tests regarding independent contractor status depending upon the law which is implicated, including the California Labor Code, the federal Fair Labor Standards Act, the Internal Revenue Code and similar California Tax law, unemployment insurance, workers compensation, etc. The majority of these tests focus on the degree of control exerted by the employer.

Understand Your Risk: Conduct an Independent Contractor Audit:
Many employers are not proactive in dealing with potential misclassification issues. Don’t be an employer reacting to a demand letter, employee wage claim or lawsuit.  Rather, take affirmative steps to identify and understand any potential misclassification risks.  To accomplish this, we suggest conducting an independent contractor audit.

One way to begin this process is to ask your accounting department to provide you with a list of individuals or entities paid by Form 1099 in 2009.  Review this list and identify any payments made by Form 1099 to individuals, especially where the individual only provided their social security number. Review the individual names on the list who provided federal tax identification numbers. Also, review the businesses or vendors with federal tax identification numbers on the list. We recommend constructing such an audit with the advice of counsel and within the protections of the attorney-client privilege.

Factors to Consider When Reviewing Independent Contractor Status:
For purposes of enforcing California’s wage and hour laws, the Division of Labor Standards Enforcement (“DLSE”) applies the “Economic Realities” test where the primary factor considered is whether the person to whom service is rendered has control or the right to control the worker as to the work done and the manner and means in which it is performed.  Here are some questions to ask:
Does the company register its independent contactors with EDD where the employer enters into a contract or pays the independent contractor more than $600?

Is the person performing services engaged in an occupation or business distinct from that of the principal?

  • Is the work part of the regular business of the principal or the worker?
  • Does the principal or the worker supply the instrumentalities, tools, and the place for the person doing the work?
  • Does the worker invest in the required equipment or materials or employ helpers to carry out the required task?
  • Do the services rendered require a special skill?
  • Is the work, with regard to locality, usually performed under the direction of the principal or by a specialist without supervision?
  • What is the workers’ opportunity for profit or loss depending on his or her managerial skill?
  • What is the length of time for which the services are to be performed?
  • What is the degree of permanence of the working relationship?
  • What is the method of payment, whether by time or by the job?
  • Do the parties believe they are creating an employer-employee relationship?

What’s The Big Deal ? President Obama Says it is a Big Deal.
President Obama has put employers on notice to be prepared to pay if they are found to have misclassified individuals as independent contractors. The Obama Administration has released details of its proposed budget for the fiscal year 2011 which reads:

The 2011 Budget for [the Department of Labor] includes an additional $25 million to target misclassification with 100 additional enforcement personnel and competitive grants to boost States’ incentives and capacity to address this problem.

While full details of this proposal have yet to be released, it is clear the Obama Administration is determined to make proper classification of workers a top priority. Maybe it should also be a priority for your company!

Jonathan Siegel is Partner in the Orange County Office of Jackson Lewis LLP and can be reached at (949) 885-1360 or  Founded in 1958, Jackson Lewis is dedicated to representing management exclusively in workplace law with 600 attorneys practicing in 45 cities nationwide.  To learn more, please visit us at

Copyright 2010 PIHRA


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