Many employers seek to avoid liability for Payroll taxes, Social Security taxes, Medicare taxes, and the payment of health care benefits by classifying employees as “Independent Contractors” instead of employees. These workers receive 1099 forms instead of W-2’s and generally receive no benefits beyond their hourly rate.
This is bad for the Government and bad for you if you are misclassified as an independent contractor. Under the tax code, your employer pays half of the social security tax that is due on your wages. As an independent you pay all of it. Although social security may not seem like a heavy tax burden, remember that it is not subject to reduction through credits or deductions; it is a flat tax and you pay 15% of your income (or the applicable rate) as an independent contractor. As an employee, you pay only 7.5%; the employer pays the other half. In addition, the usual benefits of health insurance, dental insurance, etc. that may be available to employees will not be available to you. Self employment has many rewards, but you pay a price to be your own boss. When you are not your own boss and you still pay the price as if you were then it is just unfair.
Starting January 2012, the Legislature enacted an extraordinarily tough new enforcement sanction against the misclassification of employees as independent contractors. Codified at Labor Code Section 226.8, this little known provision imposes a penalty of between $5,000 and $15,000 per violation (one pay period is one violation). If the court or jury determines that the violations are part of a pattern or practice then the penalty imposed is $10,000 to $20,000 for each violation. So, if ten waitresses, for example, are misclassified as contractors the penalty is $200,000 per pay period against the employer. This is effectively a death sentence for the business operation and so a group of misclassified workers have an extraordinary degree of leverage over their employer.
The law looks to many factors in deciding whether a person is an employee or an independent contractor. The IRS has a set of criteria and California courts apply what is known as the common law test. In each case the dispositive factor is the degree of control exercised by the boss over the person performing his or her job. Typically, the factors relevant to control include the degree of management and supervision; mandatory schedules; dress codes; direction and choice over the task or work to be performed and how it is to be done. Other factors include the nature of the worker’s task and whether it is part of the general operations of the company. If for example, a law firm hires a paralegal, that is closely related to the practice of law. Someone who repairs the elevators, or patches the roof is in a different line of work entirely and is unlikely to be an employee. Also important is whether you bring your own equipment to work and whether you work at the site of the employer. How you are paid (1099 or W-2) is also a factor that courts weigh in analyzing a worker’s status.
The determination is fact intensive and turns on the specific merits of each case. If you believe that you may be misclassified it may be worth your while to examine the issue closely because the rewards may be substantial if you have been willfully misclassified.