Be Aware of the Consequences of a Wrongful Independent Contractor Designation in California

Brokers, Contractors, Hotel Operators, Lenders and many other businesses often designate key personnel or persons who work on a part-time basis as “Independent Contractors” or Form 1099 Personnel. The Independent Contractor designation has allowed key personnel to deduct a larger amount of expenses from their taxes and the Company to avoid paying payroll taxes, overtime, worker’s compensation and benefits to the personnel so designated.

 

California has for some time frowned on the practice of designating personnel as independent contractors. For example, in California, a rebuttable presumption that a worker is an employee exists in many instances, some of which include:

 

  • A worker providing service to a company is an “employee”1
  • That persons holding professional licenses who operate as part of a company or firm are employees not independent contractors.2; and
  • If “work for hire” language is included in a contract for services, the worker is presumed to be an employee.3

 

Under a 1989 California Supreme Court case4, an “economic test” was adopted in evaluating whether a worker is an employee or an independent contractor. The key factor in this determination is whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker both as to the work done and the manner and means in which it is performed. There are multiple other factors that may be considered in making this determination.

 

On April 30, 2018, the California Supreme Court again ruled5 on the employee versus independent contractor designation and determined that if (i) a worker is doing work for a company as part of the company’s regular business, (ii) the worker performs under the company’s control and direction, and (iii) the worker is not engaged in an independent business or trade of his or her own, the worker must be designated as a W2 Employee and not as a 1099 Independent Contractor. The consequences of an improper designation of an employee as an independent contractor can be quite severe including, among other things, substantial penalties ranging from $5,000 to $25,000 as to each employee improperly designated as an independent contractor.

 

The bottom line is that California is a very pro tax and pro-employee state. Companies that attempt to avoid paying taxes and/or avoid providing worker’s compensation insurance, overtime, and benefits by designating personnel as an independent contractor are at risk in the State of California.

 

Written by Eric Dean, Partner at FitzGerald Yap Kreditor LLP, and Founder and Co-Chair of the Association of Hospitality Professionals. If you have further questions regarding the limitations on the use of independent contractor designation, contact Eric Dean at FitzGerald Yap Kreditor LLP today at (949) 788-8900 or edean@fyklaw.com.

 

Disclaimer:  This article is solely intended to provide information for consideration only. It is not legal advice and is intended solely to raise broad and general possible topics of concern for further consideration, and therefore, should not be relied on. A reader who has concerns related to the topics addressed in this article should consult his/her own advisors and not otherwise act based on the content of this article.

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  1. See Labor Code Section 3357.
  2. CA Labor Code Section 3351.5.
  3. S. G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 341.
  4. Dynamex Operations Calif. Business and Professions Code §10132.
  5. West, Inc. v. Superior Court (2018) 45 Cal. 5th 903.
By |2018-07-19T14:20:14+00:00July 13th, 2018|