Employee Misclassification Mistakes and Why It’s Important

Owning a business is complicated and has many “moving parts.” Getting everything done to make your business run smoothly can often require using resources outside of your business and hiring help for temporary or small jobs. With so many complex business relationships, it can sometimes be easy to lose track of who is your employee and who is just an independent contractor. This seems like a fine distinction, but it is essential that you get it right for purposes of complying with the California workers’ compensation statutes, as California businesses are required to carry workers’ compensation insurance for their employees.

One common mistake made by employers is believing that a written contract will control the determination of whether a worker is an employee or an independent contractor. This is definitely not true. This makes sense, as allowing a written contract to be completely controlling in whether a worker is an independent contractor or an employee would allow unscrupulous employers to classify all workers as independent contractors to avoid paying certain taxes and workers’ compensation insurance. Instead, a number of other factors, such as the nature of the work that the worker performs for the business is much more important to the classification determination. A related mistake is allowing an employee to make the determination as to whether he or she wants to be classified as an independent contractor or an employee. A worker’s preference has no bearing on whether the worker is properly classified.

A business can also make a mistake by trying to control the time, place, and manner the work is completed when dealing with a worker already classified as an independent contractor. If a business attempts to exercise to much control over the manner in which the work is done, the classification could be incorrect. The less control a business exercises over a worker, the more likely it is that worker has been properly classified as an independent contractor.

Getting the classification of workers right is essential for your business. The California labor code provides harsh penalties for businesses that have been found to misclassify employees in an attempt to get out of paying for workers’ compensation insurance. These penalties can run thousands of dollars per violation, and get steeper if the employer has a history of misclassification.

Proper classification of workers is an essential step for businesses and should be done with mindfulness. Contact us today at (714) 516-8188 to talk about your policies and your business.

Independent Contractor or Employee?

California law requires that any business having one or more employees must carry workers’ compensation insurance. Hiring workers as independent contractors is a common employment arrangement, and one employed by businesses trying to get around the law’s requirement that a business with employees must carry insurance. It is not uncommon for employers to operate under the mistaken belief that including a provision in their employment contract stating that a worker is an independent contractor is an air-tight lock on showing that the worker is not, in fact, an employee. However, this is not always the case. The contents of an agreement between a worker and a business is not the only factor when determining if a worker’s status as an independent contractor or an employee. This becomes an essential question when an employer is determining whether workers’ compensation insurance is necessary.

 

First, it is important to note that the labor code presumes that a worker is an employee. It is possible, however, to overcome that presumption. As already mentioned, a written agreement between the business and the worker is not determinative. Instead, the most important factors are actually whether the business has the right to control the worker, the way the work is done, and what work is actually performed. If the business does have the right to control these factors, then the worker is probably an employee, and not an independent contractor. So, for example, if a business tells the worker that she must be present at her desk, every day from 9 am to 3 pm, her work must be performed using particular business software and in a particular manner, then that worker is probably an employee. However, if the worker may work remotely and use her own methods to accomplish the work requested, then the worker may, in fact, be an independent contractor.

 

It is also important to note that just because a worker is paid like an independent contractor does not mean that the worker actually is an independent contractor. An employer’s decision to provide a worker with a 1099 instead of a W-2 has no bearing on whether the DLSE will decide if the worker is an employee.

 

A variety of other factors may be taken into account when deciding if a worker is an employee. These may include, but are not limited to special skills required to perform the task, whether the worker is engaged in a job that is distinct from that of the business, what tools the business provides, local custom of whether such a job is usually performed by an employee or independent contractor, and whether the worker was paid by the time spent or by the job completed.

 

The issue of whether a worker is an independent contractor or an employee is not only fact sensitive, but legally complex. Your business could face serious consequences for getting the distinction wrong. Contact me at (714) 516-8188 or email wcabdefense@hotmail.com to talk about your workers and protecting your business.

Who is Required to Maintain Workers’ Compensation Insurance in California?

Businesses in California are required to maintain workers’ compensation insurance. Under California Labor Code Section 3700, any business that employs one or more people must carry this insurance. This includes family members or friends of the owner who are employed by a business. There can be heavy civil and even criminal penalties for failing to maintain workers’ compensation insurance as is required, so it is important to understand if you and your business are required to carry it.

 

Some business attempt to classify workers as independent contractors instead of employees. It is vital that you make sure your independent contractors really do fall into that category. Merely calling them “independent contractors” does not mean that is how the law will consider them. If they are employees, then you are required to carry workers’ compensation insurance. Even if a friend or family member is only working for your business for a few hours a week, or on some other limited basis, they are likely an employee for purposes of needing workers’ compensation insurance.

 

It is also possible for a sole proprietor to purchase workers’ compensation insurance to provide extra coverage for him or herself. If this is the route you are taking, this is an issue that needs to be disclosed to your insurance carrier, and it is possible you will need to pay a different type of premium. Other viable options for a sole proprietor could include purchasing health or disability insurance.

 

Directors and executive officers of a corporation present a new set of facts. These people must be included in workers’ compensation insurance coverage. The only exception to this is if the corporation is fully owned by the directors and executive officers. In such a case, they are allowed to be excluded from workers’ compensation insurance, if the executive owns 15% or more of the corporation. This is an issue that directors and executive officers should discuss with their insurance broker before deciding to opt out.

 

An alternative to purchasing workers’ compensation insurance from a broker is to be self-insured. Self-insurance requires approval from the state. It also requires a net worth of five million dollars, net yearly income of $500,000, and a security deposit.

 

If you have questions about whether you need to carry insurance, I would value the opportunity to discuss the issue with you. Contact me at (714) 516-8188 or email wcabdefense@hotmail.com to set up a consultation.

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