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socrateaser
socrateaser, Lawyer
Category: California Employment Law
Satisfied Customers: 34836
Experience:  Retired (mostly)
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Hello, We recently acquired a small appliance repair business

Resolved Question:

Hello,

We recently acquired a small appliance repair business to add to our own. Part of the deal was that we retain a mechanic in his early 60s whom the previous owner originally hired as an independent contractor 23 years earlier (retaining the gentleman was verbally agreed to, not in writing). We note that over the years with the previous owner, however, the lines became blurred between an independent contractor and an employee relationship as the gentleman took on more work and he, eventually, was given a weekly salary for four days of work and a percentage of the profits on larger jobs (the previous owner states the original agreement was a percentage of the profits only, and that the two would sit down and hash out what was owed to the mechanic once per month, but over time the two determined it would be easier to establish a weekly amount based on the average pay the mechanic collected, hence the weekly salary). The gentleman has controlled his vacation time and reported for federal income tax purposes as an independent contractor, and he has handled his own health care.

We have stated to this mechanic that we are willing to let him stay until he decides to retire (he states it is his intention to retire in a few years), but he insists he wants to stay under the same terms. He is a likeable individual, and we appreciate his tenure, knowledge, and experience, and we would accept his staying under the status quo, but we are concerned as to our own liability, if any.

What, if any, is or can be our liability to this gentleman if we accept the present terms? Particularly, in the event of a) health-related absence (who pays his sick days?) b) injury c) retirement benefits or d) other problem(s) we may be overlooking?

If he is an independent contractor, we understand we are not responsible for these things. But since he has, insofar as the weekly schedule is concerned, acted as an employee, we are not sure to what extent, if any, we are or can be liable if we accept the status quo--especially if he is legally determined to be an employee.

Please assist us to clarify our options with respect to the gentleman. As stated, we appreciate the gentleman and are inclined to accept the status quo, assuming we are not putting ourselves at risk over this.

Please let us know. Thank you.
Submitted: 1 year ago.
Category: California Employment Law
Expert:  socrateaser replied 1 year ago.
Hello,

California is the most aggressive jurisdiction in the USA, when it comes to fining employers for misclassifying employees as independent contractors. The Employment Development Department and Division of Labor Standards Enforcement will "bend over backwards" to find an employment relationship, rather than an independent contractor relationship.

Liability includes unpaid unemployment insurance contributions; unpaid overtime; unpaid State Disability Insurance; liquidated damages equal to the unpaid overtime (double unpaid overtime wages); waiting time penalties of up to one month's wages; and a fine for not obtaining workers compensation insurance.

Additionally, EDD will report the misclassified employee filing to the IRS, and you may be subject to pay one half of the employee's unremitted FICA, FUTA and Medicare payments, unpaid federal income tax, and a $5,000 fine.

I think you get the picture.

If you would like to know whether or not your worker is potentially a misclassified employee, then Please let me know if my answer is helpful and I will be happy to provide you with a worksheet that will help you decide your risk.

And, thanks for using justanswer.com!
Customer: replied 1 year ago.

Hello,


Yes, your response rings loud and clear and answers our concerns with respect to this relationship.


 


Under the circumstances, we are inclined to offer a new employee relationship and put him on payroll IF our doing so will not rock the boat, launch a new inquisition from an "aggressive" jurisdiction into what has been done in the past, and find us entangled in an employment nightmare. We also do not wish to rock the boat for the previous owner, assuming he is liable.


 


Please forward the worksheet you mention to us. If that helps us determine this man is more of an employee than an independent contractor, then we think we will either establish a new relationship from here on out (assuming, again, it doesn't trigger an investigation into the past). If it does, we think it best, XXXXX XXXXX as it hurts to do so, to simply terminate the relationship.


 


Along those lines, if we terminate the relationship and this man decides to seek early retirement benefits (he is at the minimum retirement age), would that trigger an investigation?


 


Thank you for your help with this matter!


 


 

Expert:  socrateaser replied 1 year ago.
Along those lines, if we terminate the relationship and this man decides to seek early retirement benefits (he is at the minimum retirement age), would that trigger an investigation?

A: No. What generally triggers an investigation is either the employee's express complaint to either EDD (Form DE 230), the IRS (Form SS-8) -- or, sometimes EDD will simply decide to randomly audit a business to see if it's following the law (IRS generally only conducts such audits in conjunction with allegations of hiring large numbers of undocumented aliens).

For the worksheet, see EDD Form DE 38.

Hope this helps.
Customer: replied 1 year ago.

Thank you for the clarification. If the forms you mention trigger an investigation, then are we to assume that putting this man on payroll from here on out will not likely trigger any investigations?


If an investigation were launched, how far back in time could the investigation reach?


 


Thank you!

Expert:  socrateaser replied 1 year ago.

Thank you for the clarification. If the forms you mention trigger an investigation, then are we to assume that putting this man on payroll from here on out will not likely trigger any investigations?

 

A: There won't be an investigation, because as far as EDD and IRS know, the worker is a "new hire."


If an investigation were launched, how far back in time could the investigation reach?

 

A: Three years (state and federal).

 

Hope this helps.

socrateaser, Lawyer
Satisfied Customers: 34836
Experience: Retired (mostly)
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