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What is the difference between an independent contractor and an employee?

Moreno Valley, CA |

The company I am working for is paying me with a 1099 form when I believe I should be treated as an employee with a W-2. I'm an outside sales representative that works exclusively for this company and am required to go to company meetings. I file my own taxes, I do not get compensated for gasoline, no employee benefits. I pay for my tools for work, etc. Is all this illegal? If so, can I sue?

Attorney Answers 3

Posted

It's impossible to give you a definitive answer based on just the information you provided above. There are several factors to consider in determining whether you have been improperly classified. However, keep in mind that your employer bears the burden of proving that you are an independent contractor. And California has recently enacted some very tough laws to punish employers who willfully misclassify employees as independent contractors.

You should contact an experienced California employment law attorney regarding your specific situation.

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Posted

Whether someone is an employee or an independent contractor can be a very fact-intensive analysis, though most of the time, it's pretty clear which category someone falls in. The general rule is that a person is an independent contractor if the employer has the right to control or direct the RESULTS of the work but not HOW the work is done or even WHAT work is done.

Many employers misclassify workers as independent contractors and pay them as "1099 employees" when in fact they should be classified and paid as regular W-2 employees. Employers receive a substantial benefit from doing this, but there is NO benefit to the workers. If a worker is wrongly classified as an independent contractor instead of an employee, that worker will not be eligible for many benefits of employment or eligibility will be reduced. Areas affected include the right to:

– be paid for all hours worked or controlled by the employer;
– the legal minimum wage;
– overtime pay;
– rest and meal breaks;
– workers' compensation insurance;
– Social Security contributions;
– unemployment benefits;
– state disability benefits;
– employer benefits such as vacation, sick leave, pension, medical insurance, etc.

Also, in some states, including California, employers are subject to a penalty if they misclassify employees as independent contractors (see below).

There are different ways to determine if a worker is an employee or independent contractor. Employers must comply with all relevant laws.

FEDERAL TAX LAW: The Internal Revenue Service (IRS) looks at three areas to determine a worker’s status:

Behavioral Control – This area considers instructions and training. If the employer has the right to direct or control the work, even if it does not exercise that right, the worker is an employee. These instructions might include when to do the work, or how and where to do it; what equipment or tools to use; who the worker can hire or not hire to help get the work done; what supplies and services to buy, and/or where to buy them. If the employer trains the worker in required methods of doing the work or the procedures to get the work done, this is evidence the employer wants things done its way, which indicates the worker is an employee and not an independent contractor. Therefore, if the employer gives the worker detailed or extensive instructions on how to get the job done, the worker is probably an employee and not an independent contractor.

Financial Control – This area considers who has the right to direct and control the business, not just the work. The more of a financial or promotional investment the worker has made in the work, the more likely the worker is an independent contractor. However, there is no requirement for an investment in order to meet the definition of independent contractor. If the worker incurs expenses in performing the work but is not completely reimbursed, the worker is more likely to be an independent contractor rather than an employee, especially if these expenses are high. If the worker has the chance to make a profit or loss on the work, the worker is probably in business for himself or herself and therefore an independent contractor.

Relationship of the Parties – If the worker does not receive benefits such as medical coverage, vacation, or pension, the worker may be an employee or an independent contractor. However, if the worker receives benefits, the worker is probably an employee.

(continued in Comment below)

twitter.com/MikaSpencer *** All legal actions have time limits, called statutes of limitation. If you miss the deadline for filing your claim, you will lose the opportunity to pursue your case. Please consult with an experienced employment attorney as soon as possible to better preserve your rights. *** Marilynn Mika Spencer provides information on Avvo as a service to the public, primarily when general information may be of assistance. Avvo is not an appropriate forum for an in-depth response or a detailed analysis. These comments are for information only and should not be considered legal advice. Legal advice must pertain to specific, detailed facts. No attorney-client relationship is created based on this information exchange. *** Marilynn Mika Spencer is licensed to practice law before all state and federal courts in California, and can appear before administrative agencies throughout the country. She is eligible to represent clients in other states on a pro hac vice basis. ***

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Marilynn Mika Spencer

Marilynn Mika Spencer

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(continued from Answer above) If the worker is an employee, the employer must withhold income tax and the employee’s portion of Social Security and Medicare taxes. The employer must pay Social Security, Medicare and unemployment (FUTA) taxes on the wages the worker earns. The employer must give the worker an IRS Form W-2, Wage and Tax Statement, every year showing the amount of wages paid and taxes withheld from the worker’s pay. As an employee, the worker has the right to deduct unreimbursed business expenses from the worker’s taxes on IRS Schedule A if the worker itemizes deductions and meets the other requirements established by the IRS. If the worker is an independent contractor, the employer must give the worker an IRS Form 1099-MISC Miscellaneous Income to report what it has paid to the worker. The worker must pay his or her own income tax and self-employment tax, and may be required to make estimated tax payments during the year. The worker can deduct business expenses on IRS Schedule C of his or her income tax return. CALIFORNIA LAW: The main test in California is who has the right to direct and control the “manner and means” in which the job is performed. This is similar to the IRS’ Behavioral Control described above. California then looks at secondary factors, which include: Are the services provided on a long-term or repeating basis? Is the worker paid based on the time spent working? Are the services an integral part of the employer’s business? Does the employer establish the work hours? Does the employer determine how many hours will be worked? Does the employer dictate the order in which job tasks are to be performed? Does the worker spend all of his or her time working for one employer? Is the worker supervised? All of these factors tend to show the worker is an EMPLOYEE. Is the worker in a distinct occupation or trade? Are the worker’s services available to the general public? Can the worker hire, supervise and pay assistants? Did the worker make a substantial investment in facilities or services? Does the worker do the job without supervision? Is the worker highly skilled or working in a specialized field? Does the worker supply the tools and other materials used to do the job? Does the worker provide the location in which the work is performed? Is the worker paid at the end of the project? All of these factors tend to show the worker is an INDEPENDENT CONTRACTOR. Also under California law, an employer can be fined for “willfully misclassifying” an employee as an independent contractor. The amount of the fine ranges from $5,000 to $15,000 per violation. If there is a “pattern and practice” of willful misclassification, the fine can increase to $25,000 per violation. If you suspect you are misclassified or you want to know for sure, consult with an attorney. To find a plaintiffs employment attorney in California, please go to the web site of the California Employment Lawyers Association (CELA). CELA is the largest and most influential bar association in the state for attorneys who represent working people. The web site is www.cela.org. Click on "Find a CELA Member" and you can search by location and practice area. Many CELA attorneys represent clients throughout the state. I hope you can resolve your situation and wish you the best.

William Kevin Hodges

William Kevin Hodges

Posted

I believe this is one of the most thorough answers I have seen on AVVO. If this doesn't get best answer then I don't know what will!! Wow.

Posted

While I agree with my colleague's in depth answer, the most important factor is whether the employer has a "right of control" over the day to day activities of the employee. This is the rule of thumb that usually works in answering the question. If the employer has the ability to control the employee's work, even if they do not exercise it, the individual will usually be considered an employee. If the individual controls his or her work without employer control, they will be considered an independent contractor.

Please check the law of your state

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