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Joseph, Lawyer
Category: California Employment Law
Satisfied Customers: 5299
Experience:  Extensive experience representing employees and management
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The EDD pressured and manipulated us

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The EDD pressured and manipulated me into agreeing to pay three years in past "unpaid" unemployment insurance and basically reclassifying all of our 1099 independent subcontractors to W2 employees. They threatened us with going back several more years and facing even more fines including penalties and reporting us to the IRS. We argued and fought hard but also were very cooperative. There final judgement was that we have control over the moneys. Our comeback was that we absolutely do not. There is a very clear contract between each independent sub-contractor and the company. They just were not going to budge from their dictatorial stance. Just recently I have been seeing that there are so many domestic referral agencies operating "legally". They all seem to be soliciting membership, (which seems reasonable), in turn for access to all the resources necessary to ensure we are fully legally compliant. I am so leery of going back to the 1099 world because it has been a little over a year since our audit and judgement. Leery because it would seem that they have their eyes on us. Can you shed any light on this? Point us in the right direction for obtaining sound legally information? Thank you, David

Hello David, and welcome to JustAnswer.

I'm sorry to hear about your situation and hope I can help.

My goal is to provide you with excellent service today.

Honestly, I think you'd probably be asking for trouble if you were to try to reclassify your now classified employees as independent contractors again, after the EDD has informed you that they are employees and need to be treated as such.

Another domestic referral agency may be getting away with using 'independent contractors' instead of employees, since they've yet to come under the scrutiny of the EDD or they have different practices allowing the independent contractors control over how the work is performed and when it is done.

But your emphasis on the contract that you have between your independent contractor or employee is misplaced, as it is the least significant factor in determining whether a worker is an independent contractor or employee.

Instead the factors that are relevant are laid out here, the most important being whether the contractor or employer has control over the work done and the manner and means in which it is performed.

More than likely, your employees are now correctly classified (as the vast majority of independent contractors are misclassified and should be employees) and you would definitely be asking for another audit (as well as more fines, penalties, etc.) if you were to suddenly try reclassifying your employees as 1099 independent contractors again.

These are the factors that are considered.

In applying the economic realities test, the most significant factor to be considered is whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker both as to the work done and the manner and means in which it is performed. Additional factors that may be considered depending on the issue involved are:

1. Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
2. Whether or not the work is a part of the regular business of the principal or alleged employer;
3. Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
4. The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
5. Whether the service rendered requires a special skill;
6. The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
7. The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
8. The length of time for which the services are to be performed;
9. The degree of permanence of the working relationship;
10. The method of payment, whether by time or by the job; and
11. Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.

I realize the above information is likely not what you wanted to hear, but I hope you appreciate a direct and honest answer.

Please let me know if you have any follow up or clarifying questions.

If not, please remember to rate my answer positively so I get credit for my work.

Thanks and best of luck!
Customer: replied 3 years ago.
I am all too familiar with everyone of the almost 20 rules of determination of employee or independent sub contractor. The business I purchased in 2005 was established in 1971.

I will have to continue tomorrow morning with more explanation and circle back to my initial inquiry.
These two websites would be helpful in trying to make the transition back to independent contractors.

You were definitely missing some of the requirements, if you didn't have the contractors provide written notice that they are not employees and that the homeowner may have liability as being the employer of the worker instead.

Here are the sites:

You may want to consider becoming a member of one of these organizations too, although I'm not sure what their fees are.
Customer: replied 3 years ago.
Relist: Incomplete answer.
Joseph jumped right in and made so many assumptions as to my case, without getting the botXXXXX XXXXXne of exactly just who I am and exactly what I am all about. Just the same to address ever point that Joseph brought up and that I promised I would address this morning, (as it was late for me last night), I will proceed:
Since 1971 our company has used independent subcontractors. I bought the business in 2005 without changing a thing. I will attempt to convey our daily operations and hit upon all of the points that Joseph mentioned and that I am well aware of, for over five years now. We are two corporate officers, my wife and I. The wife does the financials. I market, facilitate advertising, sell, provide a go between experience; customer to cleaner and cleaner to customer, maintain a bank account solely for depositing and issuing moneys, maintain a scheduling board, dispatch, issue 1099's, collect payments for services, issue payments for services, maintain availability record of exactly when cleaners are available.

The contract between cleaners and the company clearly states how moneys received are divided up. On every job a percentage goes directly to the cleaner and a percentage goes directly to the company. No cleaner gets paid unless they perform and satisfy the client. If the client doesn't pay then, neither the cleaner nor the company do not get paid. Negotiations are ongoing after each job as far as to how the cut or percentage for both is worked out. Even though the contract is followed at the given split. The cut never goes more in favor of the company, it always goes more in favor of the cleaner. Cleaners often refuse to go to a job for several reasons; too far, cleaning for another agency, cleaning their own client's house, etc, job not to their liking, not a big enough job, job too big, job too dirty / filthy, job requires something they are not feeling up to doing, client's demeanor is unacceptable to cleaner, client's house stinks, client's house is unhealthy, cleaner opts to do something else, etc. Every cleaner transports themselves to any job they accept, using their own means. Every cleaner chooses, buys and uses their own product, materials, and equipment, unless they agree to use something specified by the client. (It is give and take in that respect, as the cleaner and client agree to). All cleaners that we have ever used have or obtain their own knowledge and expertise in regards XXXXX XXXXX what a client is asking for. The company, (I), focus on obtaining all information possible from a client so as to source out the most qualified cleaner for the job, (quality, type of), they are requesting. When and only when a client complains of service then I convey that to the cleaner to give them the opportunity to rectify the situation and/or just attempt to find another cleaner to do the work. If the client does not pay then I lose the money and the cleaner does not earn any money either. The cleaners do not get reimbursed for any expense that they might incur for their jobs nor anything else. Cleaners inform me daily of when they are available for jobs and I inquire daily as to when they are available or not. When I close a sale, I immediately contact those cleaners best fit for the work requested by the client to give them the details of the clients request. Because of an established relationship and trust, the cleaners will usually accept the job however, just as easily the cleaners will reject a job and I just move on to the next cleaner or contact the customer for renegotiations, etc. No cleaner does a particular job, no money for the company. I go after the job with a vengeance but still at he mercy of the cleaners. The company maintains zero inventory for the business except for a computer and office supplies. The two company officers perform no cleaning, what-so-ever. The company supplies no product, material, or equipment. Each cleaner performs their work according to their own style, approach, method, choice of products, choice of materials, choice of equipment. The company does not even make any suggestion as to how any cleaner might accomplish whatever it is that the client is requesting. Only if a particular client does request a certain approach and method to accomplish a certain goal then, I do convey their request on to the cleaner. Again the cleaner can accept or not in either rejecting the job or renegotiating with the client, etc. We never go to a client's house or property to inspect or supervise the work of a cleaner. We have never ordered a cleaner off of a job or fired them. We have however conveyed a client's desire for them to leave only in as far as passing on the client's desire or direction. Again the cleaner will not receive any money for that job, no matter how much they have worked/ cleaned if that client did not pay in full. I used to think that our company is in the cleaning business, in other words that our company's line of business is house cleaning but, have since otherwise learned that it is not. Our primary business and only business is to market, sell, dispatch, maintain cleaner database, schedule, accept and disperse moneys, issue 1099's, then of course file company taxes. The cleaners sometimes take along another cleaner / helper with them to their jobs assigned. Sometimes one or two or three helpers and sometimes not the same ones. Most of the cleaners we use have their own cleaning and other jobs that they have obtained on their own or through other agencies. One cleaner says that they do not perform other cleaning jobs other than through us. Most cleaners are not able to provide any advertisement flyers, business cards, or other advertisements posted online or in print. I am, (I do not believe anyway), am in no position to assert or demand that an individual start advertising or print up business cards just because of an EDD or IRS requirement that I have this as a proof of their business whether or not with our company or not. Especially in this sour economy of theirs. I have also cut way back on advertising expenditures. We used to spend over $3,00.00 per month on ads. Now we're down to a few hundred. Frequently a cleaner will inform me that they are re-routing their scheduled jobs and to rearrange their appointments with certain clients. All I can do is try. The cleaners sometimes forfeit jobs from us because at the last minute they receive some other job from some other source. The cleaners purchase their own vacuum cleaners, sometimes they carry two or three in order to do their work. The cleaners purchase and/or otherwise facilitate their own medical insurance coverage, not through us or recommended by us. We do not even recommend or offer any types of medical insurance nor any other type of benefits. Unskilled and/or Semi-Skilled work; Being that cleaners make their own decisions on a daily basis regarding when, where, how, why, what and everything to do with satisfying a client is indication of a skilled worker. Is simple vacuuming and dusting of a client's property necessarily a "skilled" job? No but there are decisions they make on their own which could result in not being paid for a job or which could result in getting paid more. We do not provide any type of instruction and/or training for any cleaner, ever. The cleaners are paid by the piece, according to the pre-negotiated rate and/or according to their negotiating with a client while there at the job. No cleaner is paid a salary or hourly wage. Every cleaner that does cleaning jobs sold and booked by us is fully aware that he or she is not an employee and that we provide no benefits.
Hello David,

Although you relisted the question, I will attempt to sort out the money issue that EDD had for you.

If you want to be considered a domestic referral agency, you should only accept payment for the referrals to particular jobs as a set fee or rate. The rate should be set by you. Then you can recommend a rate for the cleaners to charge but let them receive the primary payment for the services.

I can see why EDD was suspicious of your current arrangement, since it appears that you (not the household owner) is determining how much money the cleaner should or would receive (based on a negotiated percentage per job) and were not just taking a set fee and letting the cleaner negotiate these terms with the household, who could then actually be considered the employer.

You also have to include the necessary notices that apparently you were not conveying, which is that the housekeeper is an independent contractor and that the homeowner could be potentially liable if the housekeeper is injured since they could be considered the employer.

It also appears that you were operating a house cleaning service since you stated that that was your primary business. But in actuality, it is (or should be) only providing referrals to independent housecleaners, taking a referral fee instead of a percentage of what the housekeeper receives. (Your current arrangement is more like temporary agencies, who farm out employees to work for clients, and then take a percentage of what the client pays the employee). You want to avoid that and shift to only receiving referral fees instead. Ideally, the checks for cleaning services then would be payable to the housekeeper directly, and you would receive a separate fee per session scheduled.

I was advising initially based on the information that I had at the time, which was that you were primarily focused on the contracts between you and the cleaners and not that you need to restructure the way payments are made to you and the cleaners (that is, it should be separate), which is the main and seemingly determinative issue that EDD had. (There is no need to rehash the arguments you made to the EDD to me).

If you just try changing the contracts and adding the notifications, but don't change the way payment is made to you and the cleaners, you will most likely be considered an employer again if EDD decides to reaudit you. Since that is likely if you change the employees to independent contractors again, you have to make sure you operate as a domestic referral agency and not a housecleaning provider yourself.

As I mentioned, the websites I gave provide the necessary language and could assist you with compliance issues down the line, as it is a fine line between a domestic referral agency and a housecleaning business.

Anyway, the assumptions I may have made would pail in comparison to what EDD's assumptions would be in another audit, so you should make sure to restructure moneys and payments before trying to re-classify your current employees as independent contractors. If not, you would nearly assure yourself another EDD audit, fines, penalties, costs, and possibly the IRS on your case, which is clearly not something you want.
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