The IRS and the state of California are scrutinizing employers for improperly classifying employees as independent contractors. Typically, employers do this as a way of cutting costs; they can avoid payment of taxes, unemployment benefits, workers compensation benefits, overtime, etc.
The IRS is especially concerned with this issue because with the current deficits in the government, the taxes that are being avoided would be a welcome find, not to mention the benefits that employees are missing out on.
State and federal laws differ only slightly on how to determine if a worker can be classified as an employee or an independent contractor. The one thing that both state and federal can agree on is that an individual is considered an employee “if the person contracting for the services has a right to control and direct both the results of the services and the means by which those results are achieved.”
The IRS and Social Security Administration have developed a 20-factor test for determining the level of control held by the person contracting for the services. The factors focus on three primary components:
• Behavior control – the right of the worker to control how a specific task is accomplished
• Financial control – the right of the worker to control the “business aspects” of accomplishing a specific task
• Relationship of the parties – how the parties perceive their relationship
California also has several tests including those found in the California Labor Code and California Tax Code. When enforcing wage and hour laws, the California Division of Labor Standards Enforcement (DLSE) uses the “economic realities” test which, like federal law, focuses on the degree of control held by the person performing the services.
Labor law is complex; if you have any questions regarding your employment it is recommended that you contact a California labor law attorney who can help you understand your rights and in many cases will review your situation without charge.
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