Under most states’ wage payment laws, each failure to provide a pay stub to an employee counts as a separate violation. A new court ruling shows how liability can add up quickly … and it serves as another cautionary tale about mislabeling employees as independent contractors.
Recent case: California’s wage payment law requires employers to provide employees with detailed pay stubs each payday. Employers are subject to a $250 civil penalty for each violation. (For your state law, see box below.)
The 24-employee company categorized 16 of its workers as independent contractors and gave them Forms 1099-MISC at the end of the year.
Their pay wasn’t subject to withholding, they didn’t receive pay stubs and the company didn’t have Social Security numbers (SSNs) for them.
After an audit, the state labor department treated each failure to provide a pay stub as a separate violation. The result: 288 violations and a $72,000 civil penalty.
The company appealed, saying the failure to provide pay stubs was inadvertent because it thought the 16 were independent contractors. But the court didn’t buy it, saying a mistaken belief that the workers are independent contractors doesn’t absolve an employer of pay stub violations. (Heritage Residential Care v. Division of Labor, No. CV 135204, Ca.Ct.App., 6th Dist.)
The lessons: First, new hires should never be put on the payroll without SSNs. Welcome letters or information contained in orientation packets should clearly state that employees without SSNs can be subject to termination.
Second, withholding federal and state taxes from employees doesn’t depend on whether they provide SSNs. You may consider W-4s that lack SSNs to be invalid. In that case, withhold based on single/zero status until employees refile valid W-4s.
The workers in this case were, more than likely, misclassified as independent contractors. That means the employer may yet be liable to the IRS and the state for misclassification penalties.