Only true independent contractors may receive 1099s for compensation for services rendered. But the truth is that California employers give 1099 forms to people who are misclassified as independent contractors. Sometimes their motives are honest: they believe that the worker is really an independent contractor. More commonly, they either ignore the reality of the situation, pay the worker as an independent contractor, and hope to not get caught, or they know that the worker is really an employee, but pay with a 1099 despite the consequences.
So is there a way to determine quickly whether a worker is an independent contractor or an employee? Unfortunately, it is never easy. This article will provide some very basic guidelines on how to avoid a 1099 misclassification situation.
But first, it really does matter if an employer misclassifies an employee as an independent contractor. Not only are there tax consequences (about which an accountant must be asked, not a lawyer), but there can be huge problems if the employment relationship sours. (And, effective January 1, 2012, employers can be assessed large penalties for willfully misclassifying an employee as an independent contractor.)
True independent contractors are not entitled to minimum wage or overtime pay or lunch breaks. Independent contractors cannot receive workers’ compensation or unemployment benefits. 1099 independent contractors also cannot sue for violation of the Fair Employment and Housing Act, which protects employees (not independent contractors) against unlawful harassment and discrimination in the workplace.
An employee who has been wrongfully misclassified as an independent contractor can find life very difficult once the employment relationship ends. If the 1099 employee files for unemployment or workers’ compensation benefits, representatives from those agencies could potentially deny the employee’s claims. The Labor Commissioner may deny the employee his or her right to seek unpaid wages. However, before these state agencies deny the employee’s rights, representatives from the agencies should attempt to make a determination as to whether the worker is an independent contractor or employee.
Problems could also result for an employer if a 1099 misclassified employee files for any of these types of benefits with a state agency like the Employment Development Department, the Division of Workers’ Compensation, or the Labor Commissioner. As we know, the State of California needs extra revenue, and these agencies can impose fines against employers who wrongfully classify an employee as an independent contractor.
For example, the Division of Labor Standards Enforcement (“DLSE,” the parent agency of the Labor Commissioner) can assess civil penalties against such an employer for every violation of its laws in each pay period going back one year. So, for a misclassified 1099 employee who did not receive overtime wages and lunch breaks every pay period over the last year, the DLSE may impose a penalty for each violation ranging between $100 and $1,000 (the biggest penalty is for not providing paycheck stubs under Labor Code section 226.3) for each pay period. That could add up to many thousands of dollars of civil penalties for the employer.
Moreover, the chances are that if a state agency investigates an employer’s misclassification of one 1099 employee, it will also investigate the employer’s classification of other employees; if others are misclassified as independent contractors, it could lead to even greater fines. These fines are easy money for the dollar-hungry state agencies.
Not only may the state agencies assess fines against the employer, but the aggrieved misclassified 1099 employee may bring a claim for unpaid wages and penalties with the Labor Commissioner or for unpaid wages, penalties, and attorney’s fees in a civil lawsuit. If the misclassification involves a whole class of workers for the employer, it could also possibly lead to a class action for unpaid wages. Also, if the employee seeks workers’ compensation benefits and the Division of Workers’ Compensation determines that the worker was an employee, the employee may receive the benefits. The same is true for the wrongfully classified employee who convinces the unemployment office that he or she is really an employee.
With the consequences of misclassifying an employee as a 1099 independent contractor so grave, it is extremely important that these workers be properly classified. Below are the most basic guidelines for making sure a worker really is an independent contractor (DISCLAIMER: Any employer wishing to establish an independent contractor relationship with its workers should have the arrangement reviewed by an experienced employment law attorney, if not also an accountant):
- An independent contractor should not be paid by the hour. Paying a worker by the hour strongly indicates that the worker is an employee.
- An independent contractor is usually paid a flat fee for a job. A business should not require an independent contract to perform work at specified times or places. If the worker has to show up at the business on a regular schedule (i.e., Monday through Friday, 8 a.m. to 5 p.m.), the worker likely is not an independent contractor.
- A business should not have to give the independent contractor detailed instructions on how to perform his or her work. The more control a business exercises over the worker, the more likely the worker is an employee.
- A business should not have to provide the independent contractor with training on how to perform his or her job. This is strong evidence that the worker is an employee.
- A business generally cannot restrict the independent contractor from working for other businesses. Independent contractors generally are free to advertise, maintain a business location, and work elsewhere in the relevant job market.
- It usually is not important whether the worker and the business have a contract that says that the worker is an independent contractor. How parties work together determines whether the worker is an employee or independent contractor.
- An independent contractor usually uses his or her tools in the performance of services. If the worker has to use the business’s tools, then the worker is more likely an employee than an independent contractor.
- Simply providing the worker with a 1099 form does not make the worker an independent contractor.
This list is by no means exhaustive. Whether a worker is an employee or independent contractor involves a very detailed examination of that person’s job requirements and work environment.
It is also possible that one state agency may determine that a worker is an independent contractor, while another one may determine that the worker is an employee.
If you believe you have been misclassified as an independent contractor, you should seek the advice of an experienced employment lawyer. Our firm handles many 1099 employee misclassification cases. Contact us today for an evaluation of your independent contractor misclassification case.
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