A true independent contractor is a person who works independently of the owner, has a contract with the practice to perform special services and makes their own schedule. Practice owners should approach such work arrangements with caution. Most employee attorneys advise that employers should err on the side of caution and classify workers as employees. Lawsuits surface when an exempt employee sues their former employer for overtime pay and rest and meal period violations. In most cases, the employee was classified as an independent contractor, and therefore, the office was penalized on top of the back pay for misclassification of an employee. The penalties could end up being high depending on the amount of time the former employee worked for. In addition, misclassification could also lead to back taxes to the IRS, the EDD and the Franchise Tax Board. If the practice’s workers are reclassified as employees, the practice may be liable for income tax withholding, Medicare and Social Security Tax (FICA), and unemployment taxes, as well as interest and penalties. So, how do you determine if a person is classified as independent? CALIFORNIA LAW To determine whether a worker is an employee or independent contractor, the California Supreme Court has said that the right to control the means and manner of accomplishing the desired result and discharge without cause are the two most important indications that there is an employment relationship. In addition, the Court also stated that other factors also must be evaluated to make the determination if a worker should be classified as an independent contractor. The additional factors are:
Evidence of “control” includes ownership interest with operational control of the day-to-day function, the power to hire, fire, discipline employees, the power to determine salaries, maintenance of records, and control of hours, shifts, and payroll. California exempts administrative, executive, or professional persons (independent contractors) from minimum wage and overtime rules. These are the “Learned Professionals“. Read California’s definition at http://www.dir.ca.gov/dlse/Glossary.asp?Button1=P#professional%20exemption. For the learned professions, an advanced academic degree (above the bachelor level) is a standard prerequisite. California law also places emphasis on the amount of time a person must spend performing exempt duties to be qualified as an independent contractor. The law states that a person should be “primarily engaged in” exempt duties more than one-half of the time at work to be qualified as exempt. California labor laws impose penalties of between $5,000 to $15,000 for each “willful misclassification” of an employee as an independent contractor, as determined by the Labor and Workforce Development Agency (LWDA) or a court. If the LWDA or a court finds that the willful misclassification was due to a “pattern or practice” by the employer, the penalties increase to between $10,000 and $25,000 for each violation. In addition, the new law makes anyone advising an employer to willfully misclassify anyone was an independent contractor to avoid employee status jointly and severally liable with the employer. IRS (20-FACTOR TEST) The Internal Revenue Service’s (“IRS”) 20-Factor Test is still used as an analytical tool; however, the IRS’ 1996 guidelines direct its agents to focus on the overall situation rather than to emphasize one or two of the 20 factors. The legal test is whether the person receiving the services has the right to direct and control the means and details of the work. FEDERAL LAW The Fair Labor Standards Act (“FLSA”) also uses a similar test as the IRS 20-Factor Test. Common law rules examine the relationship of the worker and the business, taking into consideration all evidence of control and independence. An employer generally controls an employee’s work performance, but independent contractors determine for themselves how they will perform their work. Under the federal law, to qualify as an independent contractor, the person’s “primary duty” must be the performance of work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. Under this definition, nurses and physician assistants fall under this category. (Reference: https://www.dol.gov/whd/overtime/regulations_final.htm; search for” Learned Professionals”) The federal employee laws follow the “common law” rules which examine the relationship of the worker and the business, taking into consideration all evidence of control and independence. An employer generally controls an employee’s work performance, but independent contractors determine for themselves how they will perform their work. Under the federal laws, typically independent contractors:
- Act as their own boss by setting their own work schedule.
- Furnish their own tools and equipment.
- Are compensated on production, not on time spent in the office.
- Receive no employer benefits.
- Enter into a contract requiring both parties to terminate the agreement when the relationship dissolves.
- Are obligated to reimburse the practice owner for any losses and damages (e.g., property, equipment and instruments).
- Pay their own bills and some overhead expenses.
- Pay for their own professional liability insurance.
- Make their own estimated tax payments on a quarterly basis.
Any business entity that is required to file a federal Form 1099-MISC for services performed by an independent contractor must report information about the arrangement to the EDD. REPORTING In addition to filing the 1099-MISC form, practices are required to provide the following information to the EDD: Information about the business entity’s:
- Federal employer identification number or social security number
- California employer account number
- Business name, address and telephone number
Information about the Independent contractor’s:
- First name, middle initial and last name
- Social security number
- Start date of contract (if no contract, date payments equal $600 or more)
- Amount of contract, including cents (if applicable)
- Contract expiration date (if applicable)
- Ongoing contract
For further assistance, you may contact a lawyer specializing in employment and labor laws. You may also want to obtain the IRS publication entitled “Independent Contractor or Employee …” by calling (800) 829-3676 or by visiting the publication and forms section of the IRS website at www.irs.gov/pub/irs-pdf/p1779.pdf. Disclaimer: This article does not constitute a legal advice. For further assistance, please consult an attorney specializing in employment and labor laws.