The differentiation between employees and independent contractors is an issue which comes up regularly for Architects and Engineers, especially with regard to Workers’ Compensation insurance, where the two categories are rated differently, therefore impacting a company’s premium.
So what is the difference between an Employee and an Independent Contractor?
Generally, a person is considered an employee if the employer retains the right to control the manner and means of the work they perform (i.e., provides the work space and tools, controls working hours). An employer only controls an independent contractor with regard to the result of his work and not with regard to the means by which the result is accomplished. It is important to remember, however, that this definition is often left vague in state insurance statutes, and open to the interpretation of the courts. Contact your insurance broker if you need help making this determination about one of your workers.
What happens if I misclassify one or more of my workers as an independent contractor?
After the fact, you could be liable for a long list of expenses attached to employee status. This may include multiple years of back taxes, penalties for unpaid income taxes (both federal and state), Social Security and Medicare, and workers’ compensation insurance premiums. As well, unlike independent contractors, employees are also entitled to a number of benefits, such as overtime pay and the reimbursement of business expenses. It is possible that you’ll be required to pay these back, plus interest and penalties.
What is Senate Bill 459 (SB 459) and how does it impact my California business?
SB 459 is a California law which took effect January 1, 2012. Among other things, the law increases the penalties which result when an employer willfully misclassifies someone on their payroll. These penalties range between $5,000 and $25,000 for the “willful misclassification” of independent contractors by employers “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.”Read more about the bill and its consequences here.
What if I’ve inadvertently misclassified my employees in years past? Can I correct the mistake without penalty?
Possibly. Last September, The Internal Revenue Service launched the Voluntary Classification Settlement Program (VCSP) to address problems just like this one. The new program will enable many employers to resolve past worker classification issues by voluntarily reclassifying their workers. Eligible employers will be given the “opportunity to get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.” For detailed eligibility requirements, read the IRS announcement.
If you have additional questions about Workers’ Compensation insurance and accurate employee classification, get in touch with your local a/e ProNet broker. We’re here to help!