independent contractor or employee? what you need to know

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Independent Contractor or Employee? What You Need To Know Copyright © 2012 CPE HR, Inc. All rights reserved

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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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Page 1: 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

Page 2: Independent Contractor or Employee? What You Need to Know

Presented by:

Mike Holmes, SPHR Executive Director of Client Services

Copyright © 2012 CPE HR, Inc. All rights reserved

Page 3: Independent Contractor or Employee? What You Need to Know

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

Page 4: Independent Contractor or Employee? What You Need to Know

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

Copyright © 2012 CPE HR, Inc. All rights reserved

Page 5: Independent Contractor or Employee? What You Need to Know

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

Copyright © 2012 CPE HR, Inc. All rights reserved

Page 6: Independent Contractor or Employee? What You Need to Know

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

Copyright © 2012 CPE HR, Inc. All rights reserved

Page 7: Independent Contractor or Employee? What You Need to Know

Typical Independent Contractors

Accountant

Lawyer

Plumber

Cleaning Crew

Working for multiple individuals or businesses

Copyright © 2012 CPE HR, Inc. All rights reserved

Page 8: Independent Contractor or Employee? What You Need to Know

Typical Employees

“Production” workers

Clerical and administrative staff

Engaged in the work of the business

Copyright © 2012 CPE HR, Inc. All rights reserved

Page 9: Independent Contractor or Employee? What You Need to Know

Different Agencies – Different Factors

IRS (20 Factors – Revenue Ruling)

Behavioral Control Financial Control Type of Relationship

Copyright © 2012 CPE HR, Inc. All rights reserved

Page 10: Independent Contractor or Employee? What You Need to Know

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 business

Copyright © 2012 CPE HR, Inc. All rights reserved

Page 11: Independent Contractor or Employee? What You Need to Know

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 contract

Copyright © 2012 CPE HR, Inc. All rights reserved

Page 12: Independent Contractor or Employee? What You Need to Know

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 parties

Copyright © 2012 CPE HR, Inc. All rights reserved

Page 13: Independent Contractor or Employee? What You Need to Know

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

Page 14: Independent Contractor or Employee? What You Need to Know

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

Page 15: Independent Contractor or Employee? What You Need to Know

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

Page 16: Independent Contractor or Employee? What You Need to Know

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

Page 17: Independent Contractor or Employee? What You Need to Know

Specialized Skills

What skills are required for the work?

Does the company provide any training?

Copyright © 2012 CPE HR, Inc. All rights reserved

Page 18: Independent Contractor or Employee? What You Need to Know

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

Page 19: Independent Contractor or Employee? What You Need to Know

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

Copyright © 2012 CPE HR, Inc. All rights reserved

Page 20: Independent Contractor or Employee? What You Need to Know

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

Copyright © 2012 CPE HR, Inc. All rights reserved

Page 21: Independent Contractor or Employee? What You Need to Know

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

Page 22: Independent Contractor or Employee? What You Need to Know

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

Copyright © 2012 CPE HR, Inc. All rights reserved

Page 23: Independent Contractor or Employee? What You Need to Know

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

Copyright © 2012 CPE HR, Inc. All rights reserved

Page 24: Independent Contractor or Employee? What You Need to Know

EDD Audit

Other Options

Modification of assessment

Dealing with Tax Auditor and Compliance Representative

Installment Agreements

Copyright © 2012 CPE HR, Inc. All rights reserved

Page 25: Independent Contractor or Employee? What You Need to Know

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

Page 26: Independent Contractor or Employee? What You Need to Know

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

Copyright © 2012 CPE HR, Inc. All rights reserved