April 21, 2023 • By Dennis Beaver
For a trainee in the general contracting trades, having the benefit of a wise and experienced employer is not always a given, but 25 year-old Mike was fortunate, as he was taken under the wing of 55 year-old Eric, who holds several California licenses.
“Just give me your word that you will show up on-time, pay attention, and you will be the beneficiary of my adult working life as a general contractor and electrician. When you leave me, you will be able to go out on your own and establish your own successful business,” Eric said.
They shook hands, and for the next two years Mike “proved to be my best trainee and then full-time employee ever,” Eric told me.
Then it was time for him to leave the nest, go out on his own and establish his own little company, which he called, “Mike’s” General Contracting and Electrical.”
During those years, they were the most reliable jack of all trades people who did a myriad of small jobs for our office and home.
Hired Family to Work as Independent Contractors
Mike’s business flourished and he dropped by our office recently. “I am so busy and have enough work to hire most of my family members,” he said, adding, “I’ve made them independent contractors, to avoid all the messy paperwork otherwise required.”
“Messy paperwork? Wait a minute. Do they report to your office every day at a fixed time and then are sent out on jobs?” He said, “Of course!”
Next: “Do you provide them with tools or whatever is needed to do the jobs they are assigned?”
“Have you got workers compensation insurance for them?”
Only for myself.
“What about obligatory deductions from their paychecks? That’s what is required of an employer,” I replied.
“Look, Mr. Beaver, why can’t I just call them independent contractors — that’s what they want so more money in their paychecks? They even signed an agreement stating they are independent contractors and are responsible for their own taxes. What’s wrong with that?”
Lawyers want to have good thoughts about their friends and clients, but right then I was so disappointed. Clearly, Mike knew what he should have been doing. This father of a 3 year-old had a lot to lose.
No Doubt as to the Trouble He Faces
I asked a friend of this column, Southern California labor lawyer Jay Rosenlieb, “Just how much trouble is Mike facing?”
“He is risking the potential loss of his business, and huge penalties from state and federal taxing agencies. Merely saying, ‘You are an independent contractor,’ does not make you one.
“The IRS has a ‘right-to-control’ test that is used to determine whether an individual is an employee or an independent contractor – and most states follow this test. But there are other tests used by numbers of state and federal agencies to determine if someone truly is an independent contractor.”
California is even more restrictive, with its use of the “A-B-C” test that determines if you are an employee.
“When you are told to report to work daily and sent out on jobs by the employer, furnished with what is needed to do the job, you are an employee.
“When a company contracts with an independent contractor, they inform the person of the scope of work, but has no control over how the contractor achieves the desired result. The contractor may use their own materials and have expenses that aren’t reimbursed.
“Mike is like so many employers who knowingly misclassify employees as independent contractors to avoid:
— The employer’s share of Social Security and Medicare taxes;
— Employee benefits, such as overtime pay, holiday and sick pay;
— Unemployment insurance tax and workers’ compensation insurance.
What could it Cost Him?
Jay made it clear that he has seen countless cases where the employees – people just like Mike’s family – are “happy to be to be classified as independent contractors, because it does, at first, mean more money in their paycheck, as all those “nasty deductions” aren’t taken out.
“But if found out, the government would expect to be paid what the employee should have paid through proper payroll deductions in the first place.”
And, just as I told Mike during our office chat, Jay notes that, “The employer’s world turns upside down when a worker — who has been misclassified as an independent contractor – files for unemployment benefits and is disqualified as no record of payments to EDD can be found, or is injured on the job and tries to file a workers’ compensation claim.
“Generally, then, the state Uninsured Employees Trust will pay for medical care, and then come after the employer for reimbursement.
“What he is risking can easily run into the thousands to hundreds of thousands of dollars, including the very real possibility of being criminally prosecuted,” Jay underscores.
For the Love of Money
I phoned Eric to urge that he talk some sense into Mike before things go south.
“Dennis, I have had this conversation with him several times. I am saddened and so worried, because sooner or later someone is going to get hurt on the job, and then all that he holds dear – his wife, child, and respect from the community – will come crashing down. And all for a few dollars more!”
The moral to this story is that anyone going into business needs to consult an accountant, a business lawyer, and follow their advice. What it will cost is money well spent.