Understanding the difference between an employee & independent contractor can save
you from unexpected fines.
by Cindy Simmons
When California labor inspectors conducted a sweep of 108 spas and salons in 2008, they decided many massage
therapists who were working as independent contractors were actually employees. The reclassifications led to fines
for many spa owners. At one spa, fines totaled $40,000.
The California enforcements are part of a trend that has been observed at the federal level and in many state
governments. To increase tax collections, government agencies are categorizing fewer workers as independent
contractors.
Stan Youngs, a Seattle accountant who has worked for three massage therapists, describes the California
franchise tax board as "the Gestapo of taxing in the U.S." He also says that people in bodywork are often helpful
and trusting, making them easy targets for enforcement.
Being Blindsided
Some owners of spas who were caught up in the California sweep said they
didn't understand what was at stake. Tanya Wigger, for example, says she
mistook the inspector who came to her practice, Napa Valley Day Spa, for a
saleswoman. "She said, ‘We're just visiting spas,'" Wigger says, "acting kind
of nicey-nice." Wigger, unassuming and unaware of the potential for trouble,
continued making polite conversation. "She gave me a business card," she
adds. "I didn't look at it. I didn't have my glasses. We just visited. We talked
about hot flashes."
Wigger says the inspector, Marcia Shaw, complimented the decor of the
spa and asked what services were offered and how many employees worked
there. "I said we don't have employees, we have independent contractors,"
Wigger explains. But when she turned away to make a phone call, Wigger
noticed the inspector "taking the check register off my desk." All told, she
received a fine for every check that had been written to someone whose
name appeared on the spa's phone list that Shaw had also gotten hold of.
"She never asked for any records," Wigger recalls. "She didn't say, ‘We
need to go somewhere private.'" Instead, the inspector changed her tone
and began berating her in front of clients. "She's just hollering at me, ‘You've
been in business long enough, you've got to know these people can't be independent
contractors,'" Wigger says.
Wigger was fined $24,500 for 12 people Shaw classified as employees
instead of independent contractors. "One of them is only here one day a
month!" she says, almost in disbelief. The fines were for violating California
labor laws that require employee paycheck stubs show withholding. Wigger
was also fined for not having workers' compensation for the employees she
believed were independent contractors.
"The fines are so [high], they're just bullying you into paying it," Wigger
says. "You know you're going to have to go out and hire a lawyer because
nobody's got $24,000 lying around. We're just crossing our fingers and hoping
it doesn't put us out of business."
Wigger's attorney, Kathleen Herdell, who has an office in St. Helena, California,
says using independent contractors is deceptively attractive to business
owners. "I call it trouble in paradise," she explains. "The employers are
very happy because they're not paying payroll taxes and workers' compensation.
The workers are happy because there's more money in their pockets."
The trouble happens when a worker, upset at being terminated, makes a
claim for unemployment or overtime. If it is determined that the contractor
really was an employee, the employer may be fined. "It just compounds into
these numbers that, for a small business owner, are astronomical," Herdell
explains.
Real-life Learning Experience
Susan George's Emerald Day Spa in Napa, California, was also inspected by
Shaw during the sweep. George describes the inspector's behavior as businesslike.
"She was very kind and polite and asked if she could talk to me,"
George remembers. "She wanted to know how many independent contractors
I had."
When George told Shaw she didn't have any independent contractors,
the inspector asked to look at her payroll records, and then interviewed the
employees, asking how much they were paid and whether they got breaks
as state labor law requires.
Shaw also asked to see the list of state labor laws that employers must
post in the workplace, as well as proof that George carried workers' compensation
insurance. "I got fined $6,000 for not having workers' compensation,"
George says.
George's comparatively light $6,000 in fines may have been due to her
decision six years ago to stop using independent contractors in her spa. She
is happy to have made the switch to employing those who provide services
in her spa, and says they are well compensated. One employee, she says,
made $76,000 plus cash tips last year.
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