Independent Contractor or Employee? What You Need to Know

Independent Contractor
or Employee?
What You Need To Know

Copyright © 2012 CPE HR, Inc. All rights reserved

Presented by:

Mike Holmes, SPHR
Executive Director of Client Services


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.


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 Environment


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 liability


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 revenues


Typical Independent Contractors
 Accountant
 Lawyer
 Plumber
 Cleaning Crew

Working for multiple individuals or
businesses

Typical Employees

 “Production” workers
 Clerical and administrative staff

Engaged in the work of the business


Different Agencies – Different Factors

 IRS (20 Factors – Revenue Ruling)
 Behavioral Control
 Financial Control
 Type of Relationship


 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 business


 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 contract


 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 parties

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?


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?


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?


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?


Specialized Skills

 What skills are required for the work?
 Does the company provide any training?


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?


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 Agencies

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: None


EDD Audit
 Period Covered
 3 – year Statutory Period (CUIC §1132)
 BUT- “failure to file without good cause”


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 Due

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 explanation


EDD Audit
 Other Options
 Modification of assessment
 Dealing with Tax Auditor and Compliance
Representative
 Installment Agreements


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.


HRCI Recertification Credits

Title: Employee v. Independent Contractor, what you
should know
Date: 9/27/2012
Recertification Credit Hours Awarded: 1
Specified Credit Hours: General


Independent Contractor or Employee? What You Need to Know

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