Worksheet on Employment Status

This guide provides you with 13 questions that will assist in worker classification. It is specific to the State of California, and adapted from the Employment Determination Guide (Form DE-38), from the Employment Development Department (EDD). Download this check list to avoid a misclassification mishap and protect your employees under the full extent of the law.

Employee misclassification is the practice of mislabeling a worker as an independent contractor (IC), when, in reality, they are an employee (EE). Misclassification shorts state and federal governments millions of dollars in tax revenue every year, and is one of the most common grounds for a tax fraud suit. Mislabeling an employee as an independent contractor not only leads to tax evasion on the part of the employer, but also for the worker. Classifying employees can be a complicated process, involving many rules, standards, and various government agencies.

Is this employee and independent contractor (IC) or an employee (EE)?

For the most part, if an employer can control the work that a worker is undertaking, or can terminate the worker at will, that person is an employee. An independent contractor is responsible for their own work and is bound to a contract, barring abnormal circumstances such as a breach of contract. That being said, classifying workers is not always so cut and dry. There are other factors to consider, such as the level of behavioral control an employer has over the worker, or the financial risk that the worker is taking. Does the expectation for profit or loss fall on the employer or the worker? Is the worker free to provide similar services to other business entities? These are important questions when determining a worker’s status.

Employers are expected to withhold income tax, Social Security, and Medicare from all employees’ paychecks. ICs do not have any withholdings but are required to file all of their taxes on their own accord. When the lines are blurred between employees and independent contractors, it’s relatively common for parties to pay an improper amount to the state and federal governments.

What are the risks of employee misclassification?

Employee misclassification also runs the risk of employment law violations. Full and part-time employees are provided certain protections under state and federal laws. Depending on the state, independent contractors are not always guaranteed minimum wages or overtime pay. Additionally, ICs are not protected under the Federal Fair Labor Standards Act, meaning they are not eligible for workers comp following an on-the-job injury, nor are they eligible for unemployment benefits following termination.

When employers can save upwards of 30% on the cost of labor by classifying workers as independent contractors, an accidental misclassification could easily be interpreted as tax fraud. Incorrectly characterizing an employee not only puts your organization at risk, but puts workers in a very precarious position when it comes to their own taxes, physical health, and financial security.

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