Scrutiny over workers' status

Independent contractor or employee?

Making the call can be confusing for small-business owners. Making the wrong decision, on purpose or by mistake, can be costly.

In California, the chances of getting busted are growing as the state cracks down on businesses that wrongly claim employees are independent contractors and, as a result, not subject to a slew of taxes and labor laws.

The number of state audits and investigations of businesses climbed to 5,706 in the fiscal year ended June 30, up 54% over three years, according to state data.

Each year, about half of those checks resulted in misclassification penalties, the data showed. Last year, the state collected back charges and fines of $163.6 million, up 30.4% from fiscal 2005.

Small-business owners blame unclear rules.

"There is massive confusion over what is an independent contractor," said Scott Hauge, president of Small Business California, an advocacy group, and owner of CAL Insurance & Associates Inc. in San Francisco.

Government officials and labor groups say some business owners knowingly tag employees as independent contractors to avoid paying payroll taxes, workers' compensation insurance premiums and overtime pay and skip out on other employee costs and labor laws.

In his latest attempt to fix the problem, which has grown along with the increasing designation of workers as independent contractors, state Sen. Alex Padilla (D-Pacoima) has introduced a bill that would require any person using an independent contractor to provide information from the state Employment Development Department at the time of a work agreement.

Senate Bill 1490 would direct the EDD to develop forms that would notify the person that he or she has been hired as an independent contractor. It would include the criteria the agency uses to classify independent contractors. And it would explain how the person could contact the EDD to determine whether the independent contractor status is correct.

"The problem is misclassification, willful in a lot of cases of employers classifying workers as independent contractors to save money, to cut corners," Padilla said. "Not only is it not fair to those employees, it's also not fair to the businesses that play by the rules."

Generally, if work done by a person is under the control of the employer, then that person is considered an employee. California employers reported 2.6 million independent contractors in 2005, the latest data available.