San Diego and SB459 – The Employee v 1099 independent contractor issue
San Diego, CA February 28, 2012-SB 459 has been all over the news but regrettably few employers have had the time to understand it, much to their demise. The IRS and Department of Labor are aggressively cracking down on violators and this is one area of law you cannot afford not to understand, as it could send your firm into bankruptcy. This law served to open people’s eyes to what the old law was in the first place. There are always two sides to each story. Our law firm has represented the employer and the employee and there are arguments on both sides; understanding them will help you arm yourself.
On the one hand, one of our clients worked for a company for 22 years as an independent contractor. He now does not work there any more but did not get any benefits and now has nothing paid into his social security by his employer whom he made very wealthy. He is now older with no benefits. When he was off sick and returned to work, his employer cut down his wages even though he loyally returned to work when he should have been off because of a cardiac event that nearly killed him. No benefits, no rules, just treated as a source of labor the employer could do with as he pleased. This same employer treated other such people the same way, changing wages, hours, and terms, depending on his mood. As independent contractors he felt he owed his people nothing but a check. The way he treated them (degreed professionals BTW) reflected his philosophy. That is one side of the argument. That is one side of the argument. In the end, he lost 80% of his people. That is one of the risks he took: offer no loyalty, get no loyalty.
The other side of it is the employer’s. There are many instances where someone is hired and for most intents and purposes it is an independent contractor relationship but an employer is forced to place them on payroll to avoid the severe fines. This has a chilling effect on many of our employer clients and rather than pay all the extra costs associated with an employee, even if it’s on a part-time basis, they simply don’t hire anyone. In a recent case we worked on, an employee who was making $10.00 an hour was misclassified as an independent contractor. She had worked about 3 months at the company, yet when she left the firm, she sought a $37,000 settlement from our client. Essentially, her lawyer was seeking more than a year’s wages despite her working there a short while. The most important part of this example is the fact that both employer and worker agreed that this was an independent contractor relationship at the outset and signed a contract to that effect. Did the contract have value? No.
It’s a difficult area and the penalties are severe. This type of problem can break a company. Most cases we have seen begin with a disgruntled employee. Worse, that one person can get a number of people in your firm to file cases against you and position your firm into a position of near bankruptcy.
Although there are a number of factors available to determine whether a person is an employee or independent contractor, there is often a gray area. An employer can argue them. However, for the employer this is challenging because the more they fight it, the more the legal fees accrue for the employee, that the employer may have to pay if he or she loses. Although an employee can recover legal fees in such a case, the reverse is not true, the employer cannot. If you are not sure whether you are playing the game correctly, contact a lawyer because this is one game you cannot afford to lose and it even has lawyers (who employ people) worried. Good luck out there!
Steven Riznyk has been an attorney for 24 years. He deals with entrepreneurs worldwide and his business law web site is www.SanDiegoBizLaw.com. He is a well-known business attorney, having served clients in 54 countries and has created the first firm in the country that is equal parts business law firm and management consulting firm. His firm is equipped to fly all over the country to help clients launch their new business from either a legal or consulting standpoint. His firm is a member of the San Diego Better Business Bureau. With one of the highest success rates in the country, his firm does not take on cases it does not feel it can win, which translates to only one of ten potential cases being taken on by the firm. For information call 619-793-4827.