AB5- Bill and RCG’s payroll services

On September 18, 2019, California Governor Gavin Newsom signed into law a contentious piece of legislation—AB5—that re-classifies millions of independent contractors as employees and dramatically reshapes the California employment landscape.

Domestic workers can no longer be classified independent contractors; they are employees. Even if the employees want to be an independent contractor, you cannot treat them as such. This means, among other things, the employer must file a W-2 with the IRS instead of a 1099. All relevant taxes must be filed as an employer, as well as adherence to state and federal laws regarding work hours, payment, workers compensation, sick leave and breaks.

When domestic employees such as Housekeepers, Nannies and Caregivers are classified as independent contractors, employers avoid paying the benefits that most employees are entitled to such as health insurance, paid time off, and the employer’s side of payroll taxes. Regardless of whether or not misclassification is intentional, it puts employers at risk for owing back taxes, benefits, and penalties for its misclassified workers.

A 2018 report by the International Nanny Association found that only 5.3% of US household employers fulfilled their payroll tax obligations. This suggests that almost 95% of household employers are exposed to the risks and expenses of Social Security, unemployment, workers’ compensation, and disability insurance fines and penalties. Wage and Hour plaintiffs attorneys are becoming increasingly aware of this significant lack of compliance, and lawsuits are rising dramatically.

Here are some consequences of employee misclassification:

1. Violations for Wage Claims

There are a variety of tests and laws used to determine whether or not a worker should be classified as an employee or an independent contractor. The federal government, state government, and government agencies all apply different logic to determine misclassification, and these laws and tests lack uniformity.

Of course, this makes legal compliance difficult. If employers misclassify workers, they may be violating wage, tax, and employment eligibility laws. Employers can be held liable for failing to pay overtime and minimum wage under the Federal Fair Labor Standards Act (FLSA) as well as under state wage laws. Wage claims may go back as far as three years if a willful violation is found—when an employer knowingly violates the law.

2. Fines and Penalties

When an employee is misclassified, the federal and local government lose out on tax and payroll revenue. Employers may be responsible for paying state and federal payroll taxes as well as Social Security and Medicare taxes for all employees found to be classified incorrectly. Penalties can also be imposed for failing to timely deposit payroll taxes.

Failure to make these payments can result in additional fines. If the IRS believes you’ve intentionally misclassified workers, there is also the possibility of criminal and civil penalties and sanctions. Additional penalties and fines can be applied depending on the severity of the misclassification.

3. Liability to Pay Attorney’s Fees in a Lawsuit

In any action brought for the nonpayment of wages, the court shall award reasonable attorney’s fees and costs to the prevailing party. Significantly, the language quoted above is mandatory (“shall”) as opposed to permissive (“may”). As a result, attorney’s fee awards in unpaid wage claims often dwarf the plaintiff’s actual recovery.

Conversely, as long as their claims for unpaid wages are not brought in bad faith, employees do not have to worry about getting hit with the employer’s attorney’s fees if they lose. This “unbalanced” fee award system has paved the way for plaintiffs attorneys to aggressively pursue and prosecute wage and hour claims violations in the State of California, with employees having little to no downside risk in the litigation outcome.

4. Payments to Workers who are Re-Classified

If a worker believes they’ve been misclassified, they can file a complaint with their state Department of Labor or with the DOL. If these claims are validated, workers are eligible to claim employee benefits including 401(k) severance, health and welfare coverage, stock purchase plans, and even overtime, PTO, and rest break time. This can result in additional fines and penalties as well as increased scrutiny from tax and labor authorities.

The following is a list of some (but not all) of the obligations mandated by state and federal agencies to maintain employment compliance:

Workers compensation :

Domestic workers have the right to workers compensation if they work at least 52 hours for their employer within the 90-day period before an injury and earned at least $100 within that 90-day period. Without insurance, an employer opens themselves up to personal injury lawsuits that can lead to tremendous settlements.

Failure to carry workers’ compensation insurance in California is a criminal offense. The penalties include:

  • A stop order is typically issued to the business, violation of which could result in a fine of $10,000 or more and imprisonment in county jail for up to one year.
  • The Uninsured Employer’s Benefit Trust Fund could file a lien against an employer’s property if it needs to pay benefits to an injured worker of an illegally uninsured employer.

Paid sick leave :

From the first day of employment, employees accrue one hour of sick leave for every 30 hours worked. Some cities have municipal ordinances that provide paid sick time above and beyond state mandates.

Meal and rest breaks :

All domestic workers have the right to:

  • One 10-minute rest break for shifts from 3.5 to 6 hours in length
  • Two 10-minute rest breaks for shifts of more than 6 hours and up to 10 hours
  • Three 10-minute rest breaks for shifts of more than 10 hours and up to 14 hours
  • Authorized rest periods are counted as hours worked and must be paid.
  • On-call or on-duty rest breaks are not permitted. You must be relieved of all duties during the rest period.
  • Employers must pay one additional hour of pay at the employee’s regular rate of pay for each work day that there is a rest break violation.

All domestic worker except personal attendants have the right to:

  • One 30-minute unpaid meal break for work periods of more than 5 hours; a second meal period of 30 minutes if the work period is more than 10 hours in a day.
  • Employers must pay one additional hour of pay at the employee’s regular rate of pay for each work day in which the employee is denied their right to meal breaks.

The burden of compliance with meal and rest breaks fall on the employer to adequately track and monitor. Even if compliance with meal and rest breaks is strictly adhered to, without the appropriate documentation of those benefits, the employer is potentially exposed to litigation and penalties.

How Can I Protect My Domestic Employees from Getting Misclassified?

Misclassification carries serious penalties, risks, and consequences, so it is essential that employers have a defined program in place for engaging and managing their employees.

Riveter Consulting Group now offers payroll services and human resource which saves clients the liability of mis-classifying an employee. Contact us to discuss how we can work together to meet your needs.

The information provided in the above blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs. Before acting on any information in the RCG Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.

References –
https://www.mbopartners.com/blog/misclassification-compliance/employee-misclassification-penalties/

Belle
gold@riveterconsulting.com
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