HR That Works Blog

A California appellate court ruled that a 6’7” Dish TV installer, who was contracted for through a 3^rd party, could not sue a homeowner for negligence when he fell through the roof.  The important reminder of the law, which is pretty much the same in all states is as follows:

Limitations on the liability of the hirer of an independent contractor

Plaintiff Gravelin was an independent contractor or the employee of one. “Generally, when the employees of independent contractors are injured in the workplace, they cannot sue the party that hired the contractor to do the work.” (SeaBright Ins. Co. v. US Airways, Inc. (2011) 52 Cal.4th 590, 594, citing Privette v. Superior Court (1993) 5 Cal.4th 689 (Privette).) The same rule applies when the independent contractor, rather than his or her employee, is injured. (Tverberg v. Fillner Construction, Inc. (2010) 49 Cal.4th 518, 522.) It therefore does not matter, for purposes of this appeal, whether plaintiff Gravelin was an independent contractor as he asserts, or an employee of one as defendants assert.

The California Supreme Court has explained why the hirer of an independent contractor is usually not held liable for injuries to the contractor or its employees. The independent contractor “has authority to determine the manner in which inherently dangerous . . . work is to be performed, and thus assumes legal responsibility for carrying out the contracted work, including the taking of workplace safety precautions” to protect himself and his employees. (Tverberg, supra, 49 Cal.4th at p. 522 [contractor’s duty to protect himself]; Kinsman v. Unocal Corp. (2005) 37 Cal.4th 659, 671 (Kinsman) [contractor’s duty to protect its employees].) Thus, the hirer will not be held vicariously liable for injuries resulting from the contractor’s negligence in failing to perform its task safely. (Privette, supra, 5 Cal.4th at p. 695.) The remedy for the contractor’s injured employee is workers’ compensation, which is a cost ultimately borne by the contractor’s hirer. (Id. at p. 692.)

The general rule that a contractor and its employees may not recover tort damages from the contractor’s hirer has few exceptions. 

To read the case in its entirety go to http://www.courtinfo.ca.gov/opinions/documents/A131333.PDF

The U.S. Department of Labor (“DOL”) and Internal Revenue Service (“IRS”) both recently announced efforts aimed at curbing employer misclassification of workers as independent contractors.

• DOL Announces Memorandum of Understanding with the IRS. On September 19, 2011, the DOL announced that it had signed a Memorandum of Understanding with the IRS to coordinate efforts to address the misclassification of workers as independent contractors. Seven state agencies have already signed onto the Memorandum: Maryland, Connecticut, Massachusetts, Minnesota, Missouri, Utah, and Washington.

The initiative between the agencies is meant to “improve departmental efforts to end the business practice of misclassifying employees in order to avoid providing employment protections.” The Memorandum will enable “the DOL to share information and coordinate law enforcement with the IRS and participating states in order to level the playing field for law-abiding employers and ensure that employees receive the protections to which they are entitled under federal and state law.”

• IRS Announces Voluntary Settlement Program for Employers who have Misclassified Workers as Independent Contractors. Two days after the DOL announced its joint initiative with the IRS to coordinate enforcement to end the practice of misclassifying workers, the IRS on September 21, 2011, launched the Voluntary Classification Settlement Program (“VCSP”), a new program that will allow employers to resolve prior misclassification issues by voluntarily reclassifying workers as employees for future tax periods and paying a reduced amount in employment taxes.

To be eligible to participate in the VCSP, the employer must: 1) consistently have classified the workers as independent contractors or non-employees; 2) have filed all required Form 1099s for the prior three years; and 3) not currently be under an audit by the DOL, IRS, or a state agency concerning the classification of the workers at issue.

In exchange for agreeing to re-classify its workers, the employer will: 1) pay a reduced amount that effectively equals just over 1% of the wages paid to the workers for the most recent tax year (instead of the typical 10% tax due on wages); 2) not be liable for any interest and/or penalties on that amount; and 3) not be subject to an audit by the IRS as to the previous misclassification for the workers being reclassified under the VCSP. Employers are not required to reclassify all workers and may choose which to reclassify under the program.

Employers who wish to participate in the program must submit a VCSP application at least 60 days before it reclassifies the workers. The IRS will then review the application and determine whether to accept the employer into the VCSP.

Employers should exercise caution before participating in the program. First, participation in the VCSP does not shield the employer from potential liability under the Fair Labor Standards Act (“FLSA”). If an employer voluntarily reclassifies an independent contractor, it is opening itself up to potential unpaid overtime claims from those workers whom it reclassified. In addition, employers who participate will, for the first three years in the VCSP, also be subject to a special six-year statute of limitations (instead of the three-year limitations period that normally applies to assessment of employment taxes). It appears that the three-year extension of the statute of limitations period applies not just to the misclassification of workers, but to all payroll taxes. Finally, the VCSP application provides the IRS with information regarding an employer’s misclassification, and it is unclear whether the IRS can use this information in a later audit if it rejects the employer’s application to participate in the VCSP.

Article courtesty of Worklaw® Network firm Shawe Rosenthal (www.shawe.com)

California just passed legislation today which makes anyone other than a lawyer who “advises” employers to hire someone as an Independent Contractor jointly and severably liable for any mis-classification. And there’s more. Here’s the bill itself: http://www.leginfo.ca.gov/pub/11-12/bill/sen/sb_0451-0500/sb_459_bill_20110912_enrolled.pdf

1. Essentially, SB 495 makes it unlawful to willfully misclassify an individual as an independent contractor. If found guilty a company would have civil penalties of no less than $5,000 and no more than $10,000 per occurrence. If found guilty of repeated violations the result could be as much as $25,000 for each violation – willful is defined as with voluntary intent *( a very broad standard).
2. The company must maintain records by completing a document developed by the EDD for each independent contractor retained.
1. A notice indicating the individual will be engaged as an independent contractor
2. What EDD factors were included to determine the individual is an employee or an independent contractor
3. A statement explaining the impact the independent contractor status has on tax obligations and eligibility for labor and employment protections
4. Notice to the individual that they can seek advice from EDD or the Labor Commissioner regarding whether they were properly classified
3. Provides that any person who knowingly advises an employer to treat an individual as an independent contractor, to avoid employee status, shall be jointly and severably liable if the individual is found not to be an Independent Contractor. Of course, except for the lawyers.

No surprise, many entrepreneurs are livid about bills like this. As one entrepreneur stated:

“As a small business owner, if this passes I don’t see myself hiring any more contract programmers in state. It would be too risky. $25,000 fine and a required ‘Scarlet Letter’ on my web site? No thank you. It’s bills like this that force jobs to go overseas”

In contrast to the employer viewpoint another commentator on the bill said:

“I know an ‘employee’ working as an Independent Contractor, who stepped in a hole at San Quentin State Prison, where she worked as a registry nurse. By the time it was over, she lost half her leg, and ended up with no Worker’s Compensation Insurance, no Disability Insurance, no Unemployment Insurance, no nothing. Employers are totally bastardizing the definition of an Independent Contractor, and paying people who work only for them, 40 hours a week, under their supervision, as Independent Contractors. Great way for an employer to lure an “employee” to work for them, right up until either they’re injured on the job, are laid off, or of course when they get their 1099 at the end of the year, and find out they owe $38,000 of that $90,000 they earned in State and Federal Income Taxes. Great bill. About time. Pass it and enforce it!”

Bottom line is it is now the law. Here is the current info on it which will be updated in light of the new law. http://www.edd.ca.gov/payroll_taxes/independent_contractor_reporting.htm

In a continued effort to crack down on 1099 misclassification schemes, the PA legislature has passed a bill that defines the issue. You can see the bills history at http://www.legis.state.pa.us/cfdocs/billinfo/billinfo.cfm?syear=2009&sind=0&body=H&type=B&bn=0400 below is the most important language in that bill. MY highlights in bold.

(a) General rule.–For purposes of workers’ compensation, unemployment compensation and improper classification of employees provided herein, an individual who performs services in the construction industry for remuneration is an independent contractor only if:

(1) The individual has a written contract to perform such services.

(2) The individual is free from control or direction over performance of such services both under the contract of service and in fact.

(3) As to such services, the individual is customarily engaged in an independently established trade, occupation, profession or business.

(b) Criteria.–An individual is customarily engaged in an independently established trade, occupation, profession or business with respect to services the individual performs in the commercial or residential building construction industry only if:

(1) The individual possesses the essential tools, equipment and other assets necessary to perform the services independent of the person for whom the services are performed.

(2) The individual’s arrangement with the person for whom the services are performed is such that the individual shall realize a profit or suffer a loss as a result of performing the services.

(3) The individual performs the services through a business in which the individual has a proprietary interest.

(4) The individual maintains a business location that is separate from the location of the person for whom the services are being performed.

(5) The individual:

(i) previously performed the same or similar services for another person in accordance with paragraphs

(1), (2), (3) and (4) and while free from direction or control over performance of the services, both under the contract of service and in fact; or

(ii) holds himself out to other persons as available and able, and in fact is available and able, to perform the same or similar services in accordance with paragraphs (1), (2), (3) and (4) while free from direction or control over performance of the services.

(6) The individual maintains liability insurance during the term of this contract of at least $50,000.

(c) Factors not to be considered.–The failure to withhold Federal or State income taxes or pay unemployment compensation contributions or workers’ compensation premiums with respect to an individual’s remuneration shall not be considered in determining whether the individual is an independent contractor for purposes of the Workers’ Compensation Act or the Unemployment Compensation Law.

(d) Workers’ compensation.–

(1) An individual who is an independent contractor as determined under section 3 is not an employee for purposes of the Workers’ Compensation Act. For purposes of this section, each employment relationship shall be considered separately.

Merchandising Concept Group v. California Unemployment Ins. Appeals Bd. (2010) , Cal.App.4th

Merchandising Concept Group contracted with clothing manufacturers to provide attractive product displays to promote sales of goods in retail stores. The people who made the displays were called detailers, and Merchandising Concept Group classified them as independent contractors.

The Employment Development Department audited Merchandising Concept Group and determined the detailers were not independent contractors but employees subject to employment tax-related deductions. The Employment Development Department issued an assessment totaling approximately $110,000 plus a penalty on Merchandising Concept Group based on the reclassification of 148 of its workers. This assessment included unpaid unemployment insurance contributions, employment training taxes, disability insurance contributions, and personal income tax.

Lesson: Get your 1099 act together! HR That Works Members are encouraged to watch the Independent Contractor Webinar and review the Independent Contractor Training Module which includes a video, report, analysis checklist, sample agreement and more.