As the U.S. economy shifts and technology makes it easier to serve larger markets, more and more Americans are choosing to work as freelancers, independent contractors, and small business owners. Working independently provides many people with greater freedom and flexibility. However, it also comes with additional burdens and responsibilities.
Downside for Los Angeles Independent Contractors
While working as an independent contractor has benefits, it also creates some risks and increases costs for the worker. Some of the key differences between being an employee and being an independent contractor include:
• Independent contractors are not eligible for worker’s compensation protection, meaning that a contractor injured on the job will not receive compensation for lost work time and will be responsible for his or her own medical expenses
• In an independent contractor relationship, the company does not pay payroll taxes, Social Security, or Medicare—instead, the independent contractor must pay taxes at a higher “self-employed” rate.
• Many employment laws protecting workers do not apply to independent contractors. For example, independent contractors are not protected by minimum wage laws or overtime regulations.
• True independent contractors are generally not eligible for unemployment insurance benefits if they suddenly find themselves without paying work.
However, it is important to be aware that the fact that an employer has deemed you an independent contractor does not necessarily mean that you are considered an independent contractor for legal purposes. For example, a company may have designated you an independent contractor, yet you may still meet the legal requirements for unemployment insurance.
Misclassification for Independent Contractors in California
Since a company has greater freedom in contracting with an independent contractor, is released from expenses such as payroll taxes and worker’s compensation insurance premiums, and has fewer statutory limitations and obligations, businesses have a significant incentive to classify a worker as an independent contractor. Both the U.S. Internal Revenue Service (IRS) and California law create restrictions on the classification of a worker as an independent contractor. However, many companies ignore these regulations and treat workers the law requires to be classified as employees as independent contractors.
IRS Classification of L.A. Workers
Under the Internal Revenue Code, a worker’s classification depends on the nature of the relationship between the worker and the company, including financial arrangements and working conditions. Some of the core factors determining whether a worker must be classified as an employee include:
• The degree of control the company exercises over what the worker does and when and how the worker performs the work. The greater the control exercised by the employer, the more likely it is that the worker will legally be considered an employee. For example, it would be unusual for an independent contractor to be required to work onsite during specified hours on a regular basis.
• The management of and control over financial terms. In a true independent contractor situation, the terms of a contract are typically negotiated between the company and the worker. If the company has a blanket policy regarding payment rates, processing, expense reimbursement and such, and the worker is required to comply with the company’s policies and procedures, this weighs in favor of treatment as an employee.
• Control of tools, equipment, and other practical aspects of the business arrangement. Generally, an independent contractor will provide his or her own tools and equipment, and manage that equipment independently. For example, a graphic designer who reports to an office to conduct design work on the employer’s computer is more likely to be designated an employee than one who works on his own computer at home or in rented office space and submits designs to the company.
Other aspects the IRS considers include the duration of the relationship and how key to the company’s operations the work performed is.
California Classification of Workers
When determining whether a worker is an employee or an independent contractor for most matters handled by the Division of Labor Standard Enforcement (DLSE), an “economic realities” test is employed. This test is similar to the IRS assessment, and takes into account issues such as:
• The degree of control the company exerts over the worker
• Whether the work performed is core to the business operations of the company
• Who supplies tools and other equipment and materials
• The degree to which the worker’s managerial skills impact his profitability
• Whether payment is based on hours worked or project completion
• The duration of the working relationship
Protect Yourself as a Independent Contractor in Los Angeles County
Many workers believe that because they have signed an independent contractor agreement, or because an employer does not withhold payroll taxes and issues 1099s, they are legally independent contractors. It benefits employers when workers think that the contract or payment method determines the nature of the relationship, but it’s not accurate.
An employer cannot transform a worker who is legally classified as an employee into an independent contract by adopting a specific payment method, nor even by entering into an independent contractor agreement. With a very few small exceptions, the protections granted to an employee under federal law and California law cannot be contracted away, and they cannot be erased by labeling a worker an independent contractor.
Remedies for Misclassified Independent Contractors in California
The remedies available to an employee who has been misclassified as an independent contractor will depend on the nature of the rights that have been infringed and laws that have been violated as a result of the misclassification. Some common violations include:
• Failure to pay legally-mandated overtime rates
• Failure to provide mandatory meal breaks or rest periods
• Denial of unemployment insurance benefits due to improper classification
• Denial of worker’s compensation benefits due to improper classification
• Failure to make the employer’s payroll tax contributions or withhold payroll taxes
Often, when an employee has been misclassified, the employer will be in violation of multiple state and federal laws, and the employee may be entitled to more than one type of compensation. These issues are governed by different statutes and different governmental agencies, including the U.S. Department of Labor, the California Division of Labor Standards Enforcement, the state and federal Internal Revenue Services, and the California Employment Development Department. Thus, it can be difficult for a misclassified employee to know where to start, or what types of compensation he may be entitled to.
Talking with an experienced California employment attorney can be the best first step toward recovering fair compensation, which may include:
• Backpay for unpaid overtime wages, perhaps with penalties attached
• Compensation for benefits lost as a result of the misclassification
• Employers making back payroll tax contributions on behalf of the employee
If you believe that you have been misclassified, and as a result have lost overtime pay, been denied benefits, been disqualified from unemployment or worker’s compensation claims, or otherwise lost rights and benefits you would have been entitled to as an employee, schedule a free consultation to learn more about your options.