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A little-known state law intended to track deadbeat parents could spell trouble for the increasing number of businesses that depend on the help of independent contractors.
The new law, which took effect in January, requires businesses to notify the state within three weeks of hiring an independent contractor, so the state can better track the fluid work force that has become a staple of the modern economy, particularly the high tech industry.
The legislation was intended to help the state garnish the wages of elusive parents with delinquent child support payments who are hopping from job to job, one step ahead of government collection agencies. But buried within the law is a provision that also allows the state to use the information to make sure businesses are correctly classifying their workers.
"Companies that hire significant numbers of independent contractors will now be far more visible to auditors, far earlier," said Terrie Weinand, chief operating officer at PrO Unlimited, a company that helps businesses comply with tax laws.
The classification of independent contractors has become a serious matter in recent years, as government officials, particularly in California, have started to aggressively monitor the relationship between company and worker, and as the number of such workers has risen.
The number of temporary help jobs has grown 577 percent nationwide, according to a General Accounting Office report released last year.
Businesses that misclassified employees as sole proprietors to save money on payroll taxes have later had to cough up huge payouts in back taxes and court claims. This past December, Microsoft announced a $97 million settlement of lawsuits claiming the company's contingent workers should have been treated as employees. Pacific Gas & Electric and Pacific Bell have seen similar legal actions.
Independent contractors make up 25 percent to 40 percent of the Bay Area work force, Weinand says, and many have faced daunting income tax audits themselves.
"A little fudging, or a misclassification, could make the difference between a healthy bank account and having to sell your house," Weinand said.
The state's new law, requiring businesses to report employee information to the California Employee Development Department throughout the year, rather than just at tax time, increases the chances of an audit, department officials say. In the past, companies submitted contractor information to the Internal Revenue Service, which would eventually make it back to the state within a few years. Under the new law, however, this same information goes straight to the state within weeks.
"We're getting this information almost immediately," said one auditor, who requested anonymity to comply with department policies regarding communications with the media. "All I have to do is plug in a Social Security number to find out where someone has been working and how they have been classified."
Penalties for misclassifying a worker are steep-in addition to having to pay back taxes, a company could be fined up to $100,000 and, in extreme cases, could face criminal charges.
Businesses are so leery of getting audited, that few would even discuss their use of independent contractors on the record.
"The state will allow a startup to get going for a few years, but eventually it's going to want to see your list of contractors," said Ron Bourquin, chief financial officer with Cardema, a Fremont based medical device company. "Like it or not, it's standard operating procedure."
The state's Employment Development Department was not eager to discuss the new law, or how it will be implemented, either. "As far as I know, the information collected will only be used to track parents with delinquent child support payments, " said Suzanne Schroeder, a department spokeswoman.
But the fine print of the law clearly allows the department to use the information for the "administration of the (Unemployment Insurance Code)," which encompasses the state's independent contractor laws.
The department auditor, who withheld her name, said she has been instructed to use the information as she sees fit to best enforce state laws. "It's a whole new ball game," she said.
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