Wednesday, May 16, 2012

Squishy Definition of “Independent Contractor” Can Land You in Jail

In April two San Jose business owners and an employee were arrested for workers’ compensation insurance fraud and now face up to 5 years in the Big House plus $50,000 in fines and restitution.

The couple was busted when a part-time, weekend employee hurt himself on the job but reported his injury to his full-time employer instead. Fellow full-time employees who knew this was a lie ratted on him and the California Department of Insurance investigated.

What they found was that the weekend employer had not reported the man’s injury to their workers’ compensation carrier. The investigation also revealed that the employer paid part-time employees cash to keep them off the payroll and off the Employment Development Department’s radar.

With workers’ compensation premiums ranging from 1-50% of payroll and general liability premiums being as high as 15% of payroll, the expense of an employee is huge. Add that to the 8% payroll tax and Obama care, there is a growing incentive for businesses to hire only independent contractors(ICs) or consultants. More and more companies cheat by paying employees partially in cash and partially by payroll check.

A new law signed by Gov. Jerry Brown makes it important for businesses to follow the rules more closely. The law targets business owners using ICs by dramatically raising the penalties for those found to have willfully misclassified workers. Fines start at $5,000 and range as high as $15,000 per violation. The size of these penalties is unprecedented in the Labor Code- previously fines were in the $50 to $100 range.

It gets worse. If the employer is found to have engaged in a "pattern or practice" of
misclassification, these fines skyrocket up to a minimum of $10,000 per violation, with a cap of a whopping $25,000 per violation.

Basically, the state is trying to reduce the number of ICs so it doesn’t have to pay disability if they get hurt. A business using a true independent contractor does not have to provide workers’ compensation benefits. Also, the money paid to an IC is not charged as payroll on the business’s insurance policies for workers’ compensation and liability. These policies are audited regularly and the policyholder is charged a premium based on a percentage of payroll.

The state is forcing employers to pick up more of the tab for employees’ care and there is no way around it. As deficits rise, look for more aggressive enforcement by government agencies. For questions about workers’ compensation and business insurance, call Mimi Watson at Allied Brokers.

Visit our website at for information about all the types of insurance we offer. Or call 1-888-505-7988 for a free rate quote.

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