When is a "Sub-contractor" an Employee?

An e-mail from this week:

... [Questionable Business Practices, Inc.] uses the old 1099 trick for their employees and then takes 90 days to pay them. They [the employees] report to work on the employer's schedule, use the employer's hardware and software, and office space. Get an hourly rate (they do get time and a half but after 50 hrs and no double time on Sunday) Some are tired of waiting for their checks and fear they will be left out in the cold at one point. ...

The charming company referred to above is an effects shop in Los Angeles that is usually behind in its payments to workers with the general excuse of: "Hey, we really want to pay you, dude, but [Disney, Warners, Universal, choose one] hasn't paid us yet!"

I wrote to the individual approaching us that this is an old trick in Tinsel Town ...

Many companies sailing close to the wind, financially speaking, ignore the well-known IRS guidelines which dictate that workers who 1) work in-house, 2) take directions from supervisors, and 3) use the company's equipment/software are acting as employees and not a sub-contractors. But -- and I hope you're sitting down for this -- companies ignore these rules because there's financial advantages that accrue to them. (Who would have thought?)

Companies which use the sub-contracting gambit don't pay unemployment insurance, don't pay Social Security taxes, and (perhaps most important), aren't on the hook having to pay wages in a timely fashion. Any bonafide employee, you see, can run to the California Labor Commisioner after five days of no paycheck and file a complaint. And for every day thereafter -- up to thirty days -- that the unpaid worker fails to receive that paycheck, the non-paying employer is required to pay an additional day's pay.

A fine rule, yes? No wonder questionable employers try to dodge it.

Several years back, the IRS contacted TAG for information about sub-contracting violations. They explained the Federal guidelines about sub-contractors, which I vaguely knew but seldom focused on. At the time, the Feds were looking for Hollywood corporate entities who were abusing sub-contracting rules, of which there were many. As one of the agents explained to me, Washington D.C. had long been aware of movie scofflaws, and their on-going abuse of Federal tax rules. At that time, the Internal Revenue Service was making a concerted effort to rein the abusers in.

But it turns out, the effort fell short. And it turns out, this sort of crap continues to go on all the freaking time.

I'm shocked.

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Kaplan here ..

I've done some research and found the following avenues for artists interested in reporting their wrongful classifications:

EDD
California's Employment Development Department is very interested in recovering lost state taxes and have some forms available to interested parties. The Employee Determination Guide was meant to help buisness determine proper classification, but certainly works for employees who aren't clear if they are properly classified.

There is also the Assessment or Audit Lead Referral form which can be used to either have EDD make a determination as to your status (and possible claim), or direct them to initiate a claim against an employer.

DSLE
The California State Division of Labor Standards Enforcement is the agency that is capable of recovering lost overtime wages. This link lists the local regional offices where people can file a claim. They have also set-up 888-275-9243 (888 ASK-WAGE) as a toll free number for wage questions.

IRS
The Internal Revenue Service, as Steve mentioned above, is very interested in helping correct mis-classifications of this nature. They have a webpage dedicated to reporting tax fraud. That pages links to the Information Referral form needed to initiate a claim.