The California legislature passed a new law in 2019 (AB 51) barring employers from requiring employees to enter into arbitration agreements that cover wage and hour claims and FEHA claims (discrimination, harassment, retaliation). Once in effect, the mandatory arbitration ban will apply only to contracts that are entered into, modified or extended on or after Jan. 1, 2020. Thus, arbitration agreements already in existence appear to enjoy the benefit of a grandfather provision.
That law was supposed to take effect January 1, 2020, and would have applied to arbitration agreements entered into after that date. However, business groups led by the California Chamber of Commerce filed a lawsuit seeking to enjoin the state from enforcing the new law, arguing that it is preempted by the Federal Arbitration Act (FAA). In late December, the Eastern District of California (Judge Mueller) temporarily enjoined enforcement of the new law pending further court proceedings. After considering further briefing, the court has now granted a longer injunction against the law, which will be in place until the litigation is resolved on the merits.
California employers should continue to monitor this issue as its ultimate outcome will impact the continued validity of arbitration agreements used in the employment relationship. For now, though, mandatory arbitration agreements in California are still permissible.
If you need to hire some extra workers, adding a person who must be classified as an “employee” brings with it a set of obligations under state and federal labor and tax laws. You generally must withhold from wages federal and state income tax, the employee’s share of Social Security and Medicare taxes, and the business must pay the employer’s share of Social Security and Medicare taxes, pay federal unemployment tax, worker compensation taxes, and complete the I-9 employment verification process (many companies must also E-Verify employees they hire). Given these obligations, our clients frequently inquire as to whether it would be better to simply use 1099 independent contractors in some circumstances. While it would undoubtedly be easier to use independent contractors, that approach is appropriate only in certain circumstances.
A. What is a 1099 Independent Contractor
An “independent contractor” is an individual (or a company) that performs a service or provides a product to another company without entering into a traditional employment relationship. Individuals who act as independent contractors are also sometimes referred to as “consultants,” “1099’s” or “1099 employees”, the latter of which are derived from the name of the IRS form that a company issues the contractor at years’ end for the work performed. The employer benefits from this arrangement because it does not have to manage employment tax issues or provide fringe benefits (e.g., health insurance, paid vacations), and generally the company’s obligations end at issuing a Form 1099-MISC to report what was paid to the independent contractor for the work performed. Independent contractors often work for a number of different clients at any given time and are not an “employee” of any particular company, but are most frequently self-employed and may even have formed their own company.
B. Potential Company Liability: General Concerns
The company is generally not legally responsible for an independent contractor’s misdeeds. However, that protection is not absolute, and there are occasions when businesses may find themselves legally liable, so they should be aware and try to work additional protections for the company into a written agreement with the contractor. The general rule (Respondeat Superior) is that employers are responsible for the things that employees do in the course of their work. But this rule does not extend to the actions of independent contractors because there is no employment relationship. There are nonetheless some circumstances where a company may find itself liable for acts of its independent contractors, including the following situations:
- Sexual harassment – Employers have a duty to maintain workplaces that are free of sexual harassment. If an employer either knows or should know that an independent contractor is unlawfully harassing employees, the employer may be liable for failing to protect employees.
- Agents – An employer’s agents may be employees, or they may be independent contractors. Under the general principles of agency law, if a third party is injured because of the actions of a non-employee agent, when the agent is acting on behalf of the principal/employer, both the agent and the employer may be liable.
- Negligent hiring – Businesses also have a duty to screen independent contractors carefully. In some states, companies have a duty to its employees and to the public to exercise care in the hiring of independent contractors.
C. Potential Company Liability: Misclassification of Employees
The biggest mistake that companies make (and the biggest source of potential liability) is misclassifying workers as independent contractors when they should be classified as employees. Contrary to popular belief, a company and a worker cannot just decide to have an independent contractor relationship as opposed to an employment relationship. Rather, the nature of the relationship is determined by the US Department of Labor (DOL) and the Internal Revenue Service (IRS) – both of whom have set out criteria for determining whether a worker is properly classified as an independent contractor.
The U.S. Department of Labor generally looks at how much control the business owner exercises over the way in which the worker accomplishes a task. The IRS, which is interested in this distinction for tax purposes, looks at a longer list of factors including the worker’s expectation of the length of the arrangement, who owns the tools, where the work is accomplished, and whether the task is central or collateral to the business owner’s business. The IRS pays particularly close attention to worker misclassification because it affects the revenue they collect from employment-based taxes.
The IRS and DOL are more likely to classify as an independent contractor a worker who:
- can earn a profit or suffer a loss from the activity;
- furnishes the tools and materials needed to do the work;
- is paid by the job via invoice (not by the hour or via a salary through payroll);
- works for more than one company at a time;
- invests their own money in equipment and facilities;
- pays his or her own business and traveling expenses;
- has established their own distinct business structure (e.g., LLC or a corporation);
- is not provided the option to join company-sponsored benefit programs; and
- maintains separate business insurance that covers the work to be performed.
The penalties for misclassifying an employee can vary, depending on whether the DOL or the IRS is the agency handling the investigation. Regardless, employers can expect to pay back wages (including overtime, if applicable), back payroll taxes, fines, penalties, and even attorneys’ fees. If the IRS suspects fraud or intentional misconduct, it can impose additional fines and penalties including penalties that include 20% of all of the wages paid, plus 100% of the FICA taxes, both the employee’s and the employer’s share or criminal penalties of up to $1,000 per misclassified worker and one year in prison.
D. Documenting an Independent Contractor Relationship
While no written agreement is technically required, it is a good idea to draft an Independent Contractor Agreement that spells out the rights and responsibilities of each party. Taking this step will help resolve ambiguous situations in your favor, and may even illustrate the fact that the individual is not suited to be an independent contractor but should, instead, be hired as an employee. At a minimum, the agreement should:
- Refer to the worker as a contractor and refer to payments as contract payments (not wages);
- not prevent the worker from taking on other projects;
- not require full-time work for you or working every day on your premises;
- Specify that payments should be due on completion of the project or at designated progress points;
- Identify the duration of the relationship, rather than leaving it open-ended;
- Decline to pay for business expenses incurred in the performance of the work, except in limited, specified instances;
- Require the submission of invoices to get paid; and
- Note that the worker will be issued a Form 1099 for the work performed.
E. Takeaway for Employers
There is no denying that independent contractors impose less of an administrative burden and expense on employers. However, companies do not have “carte blanche” to use independent contractors whenever they like. Their use must fall in line with the guidelines and circumstances outlined by both the IRS and DOL. The current trend among these agencies and the court system is to favor the employment relationship – which is another way of saying that the government is skeptical about the wide spread use of independent contractors. Thus, employers should tread carefully. Make sure the work you need performed is appropriate for an independent contractor, and document the relationship with an appropriate agreement.
C2 provides strategic HR outsourcing to clients who want to develop optimal workforce strategies and solutions to allow them to be more competitive and profitable. C2 blog posts are intended for educational and informational purposes only.
The federal minimum wage rate of $7.25 has remained unchanged since 2009. Effective January 1, 2020, twenty-one (21) states have adopted a higher minimum wage than the federal rate.
To help ensure that the minimum wage keeps pace with the rising cost of living, many states and municipalities adjust (or will adjust) their minimum wage rates annually. Other jurisdictions adjust their minimum wage rates periodically through legislation or ballot initiatives.
The chart below reflects the new minimum wage rates for those states whose minimum wage is higher than the federal rate:
||Minimum Wage Rate
|Minnesota (Small Employer)
| Minnesota (Large Employer)
| South Dakota
Most employers with more than ten (10) employees are required to keep a record of serious work-related injuries and illnesses. (Certain low-risk industries are exempted.) Minor injuries requiring first aid only do not need to be recorded. Employers record and keep track of injuries using OSHA Form 300.
Employers must maintain injury records at the worksite for at least five years. Each February through April, employers must post a summary of the injuries and illnesses recorded the previous year. Also, if requested, copies of the records must be provided to current and former employees, or their representatives. Employers use Form 300A to summarize the previous year’s illnesses and injuries, and to post for their employees to view. Form 300A also displays the calendar year covered, company name and address, annual average number of employees and total hours worked by all employees covered by Form 300.
For some employers, OSHA Form 300A must also be filed electronically with OSHA on or before March 2nd of each year, and covers injuries that happened during the preceding calendar year. OSHA’s slightly revamped Injury Tracking Application (ITA) is accessible from the ITA launch page, where employers can provide their OSHA Form 300A information. The date by which certain employers are required to submit to OSHA the information from their completed Form 300A is March 2nd of each year, which covers illnesses and injuries from the prior calendar year.
However, only a small fraction of establishments are required to electronically submit their Form 300A data to OSHA. Establishments that meet any of the following criteria DO NOT have to send their information to OSHA. These criteria apply at the establishment level, not to the firm as a whole.
- The establishment’s peak employment during the previous calendar year was 19 or fewer, regardless of the establishment’s industry;
- The establishment’s industry is on this list, regardless of the size of the establishment; or
- The establishment had a peak employment of between 20 and 249 employees during the previous calendar year AND the establishment’s industry is not on this list.
If you have additional questions, OSHA’s ITA site (for electronic filing) and its general website, provide a wealth of additional information about OSHA’s recordkeeping forms and filing requirements.