Independent Contractor or Employee? What You Need to Know

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How to identify the difference between an employee and independent contractor in your business. What are risks and pitfalls of misclassifying them?

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Independent Contractor or Employee? What You Need to Know

  1. 1. Independent Contractor or Employee? What You Need To KnowCopyright © 2012 CPE HR, Inc. All rights reserved
  2. 2. Presented by: Mike Holmes, SPHR Executive Director of Client ServicesCopyright © 2012 CPE HR, Inc. All rights reserved
  3. 3. About CPEhr... Founded in 1982, CPE HR is the oldest privately held outsourced Human Resources Company in California. Dedicated to meeting the employment-related needs of outstanding businesses, CPE HR offers the human resource services, expertise and products necessary for our clients to be competitive and successful in today’s complicated, volatile and ever-changing business environment.Copyright © 2012 CPE HR, Inc. All rights reserved
  4. 4. About CPEhr... Industry Commitment • Member, Professionals In Human Resources Association (PIHRA) • Member, Society for Human Resource Management (SHRM) • California Chamber of Commerce • Other California Chamber’s • Clients in 42 States Specialize in California Employment EnvironmentCopyright © 2012 CPE HR, Inc. All rights reserved
  5. 5. Why does it matter?  Can be expensive for the employer  Taxes  Payroll taxes  Personal income tax deductions (employee)  Penalties and interest  Statuary violations  Payment of wages, breaks, etc.  Workers’ Compensation  Safety requirements  May be individual liabilityCopyright © 2012 CPE HR, Inc. All rights reserved
  6. 6. Why so important now?  Renewed interest from State and Federal agencies  Cal. Senate Bill 459 aka “The Job Killer Act” effective January 1, 2012  Penalties between $5k and $25k for “willful misclassification  Employer must post violation on their website  State now sharing information with IRS and DOL  State and Federal governments need to increase revenuesCopyright © 2012 CPE HR, Inc. All rights reserved
  7. 7. Typical Independent Contractors  Accountant  Lawyer  Plumber  Cleaning Crew Working for multiple individuals or businessesCopyright © 2012 CPE HR, Inc. All rights reserved
  8. 8. Typical Employees  “Production” workers  Clerical and administrative staff Engaged in the work of the businessCopyright © 2012 CPE HR, Inc. All rights reserved
  9. 9. Different Agencies – Different Factors  IRS (20 Factors – Revenue Ruling)  Behavioral Control  Financial Control  Type of RelationshipCopyright © 2012 CPE HR, Inc. All rights reserved
  10. 10. Different Agencies – Different Factors  Department of Labor (DOL) – Federal  Control over manner of work  Opportunity for profit or loss  Investment in equipment and materials  Special Skills  Permanency of the relationship  Extent work is integral part of the businessCopyright © 2012 CPE HR, Inc. All rights reserved
  11. 11. Different Agencies – Different Factors  Department of Labor Standards Enforcement (DLSE) – State  Distinct occupation or business; not part of the regular business  Investment in equipment; use own tools  Opportunity for profit or loss  Unique skills  Rights of control in the manner in which the work is performed  Relationship can be severed by breach or contractCopyright © 2012 CPE HR, Inc. All rights reserved
  12. 12. Different Agencies – Different Factors  Employment Development Department -EDD  Primary Factors  Right to control the manner in which work is performed  Quit/discharge at any time  Part of regular business/Separately established business  Profit/Economic risk  Investment/Risk of loss  Secondary Factors  Employees doing same work  Who furnishes tools/equipment  Skill of work/training required  How payments are made/understanding of the partiesCopyright © 2012 CPE HR, Inc. All rights reserved
  13. 13. Degree of Control/Manner  Has the company provided the individual with specific operating procedures? Are any other specific instructions given as to how the work is to be performed?  Does the company schedule when the individual is to be at work?  Does the company provide the work location, equipment, supplies, etc.?  Does the company have control over the operation as a whole?Copyright © 2012 CPE HR, Inc. All rights reserved
  14. 14. Profit and Loss/Investment  Does the individual have a separate and distinct business?  Does the individual have his/her own clients that are not associated with the company?  Can the individual make the decision to have someone else perform the work?  Does the individual have an investment in equipment, etc. that is substantial?Copyright © 2012 CPE HR, Inc. All rights reserved
  15. 15. Profit and Loss/Investment  Does the individual advertise as a separate business? Does he/she hold him/herself out as a separate business?  Does the individual have an opportunity for additional profit depending on his/her own managerial skills?  Does the individual hire his/her own employees?  Is the individual licensed to perform the work?  Is the individual reimbursed for expenses?Copyright © 2012 CPE HR, Inc. All rights reserved
  16. 16. Integral Part of the Business  Is the work the type of work which is performed by the business for its clients/customers?  Does the Company have employees who do the same type of work?Copyright © 2012 CPE HR, Inc. All rights reserved
  17. 17. Specialized Skills  What skills are required for the work?  Does the company provide any training?Copyright © 2012 CPE HR, Inc. All rights reserved
  18. 18. Nature of the Relationship  Can the individual quite or be fired at any time? Or, is there a contract for a specified job that is paid upon completion? Can the individual bring an action for breach of contract?  How is the individual paid? By the job, hourly, fixed amount for a certain time?  Is there an intent to continue the relationship for a long period of time?  What are the parties’ respective understandings with respect to the relationship?  Is there a written contract?Copyright © 2012 CPE HR, Inc. All rights reserved
  19. 19. Potential DLSE Actions  Investigation – “Employee” Questionnaire  Citations/Penalties  Recordkeeping  Overtime  Rest/Meal Periods  Check Stubs  Uniforms/Tools  Workers’ Compensation  Other violations of IWC Orders or Labor Code  DLSE may share information with other State and Federal AgenciesCopyright © 2012 CPE HR, Inc. All rights reserved
  20. 20. EDD Audit  Date Gathering  Review of Records  General ledger/financial worksheet  Bank records – payments to individuals  Payroll reports (if any)  Worker Interviews  Meeting with “Employer”  Possible Role of Accountant/Attorney  Worst Response: NoneCopyright © 2012 CPE HR, Inc. All rights reserved
  21. 21. EDD Audit  Period Covered  3 – year Statutory Period (CUIC §1132)  BUT- “failure to file without good cause”Copyright © 2012 CPE HR, Inc. All rights reserved
  22. 22. EDD Audit  Proposed Notice of Assessment  Taxable Wages  UI  ETT  SDI  PIT  Plus penalties and interest  Exit Interview  Opportunity to provide additional information/explanations  Finalized Assessment – Amount DueCopyright © 2012 CPE HR, Inc. All rights reserved
  23. 23. EDD Audit  Appeal Rights  If no appeal, process continues  Will put hold on involuntary collection  Worst response: Do nothing  Involuntary collection  Tax liens  Appeal even if late with explanationCopyright © 2012 CPE HR, Inc. All rights reserved
  24. 24. EDD Audit  Other Options  Modification of assessment  Dealing with Tax Auditor and Compliance Representative  Installment AgreementsCopyright © 2012 CPE HR, Inc. All rights reserved
  25. 25. Be proactive…  Read through the Labor Department’s rules and examine workers’ job descriptions to determine whether classifications are correct.  Complaints should be investigated promptly. A worker claiming that they are entitled to a particular status or financial benefit should be heeded and employers should be sure to examine the case.  Review the various departments’ guidelines. For example, the IRS provides clear eligibility parameters for determining independent contractor status.  Consult with an attorney or human resources professional for assistance in determining an individual’s status.Copyright © 2012 CPE HR, Inc. All rights reserved
  26. 26. HRCI Recertification Credits Title: Employee v. Independent Contractor, what you should know Date: 9/27/2012 Recertification Credit Hours Awarded: 1 Specified Credit Hours: GeneralCopyright © 2012 CPE HR, Inc. All rights reserved

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