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New California Law Requires Employers to Report Independent Contractors

December 26, 2000

A new California law intended to assist in locating parents for the purpose of collecting child support payments will require businesses and government entities to report specified information about independent contractors to the California Employment Development Department (EDD).

California State Senate Bill 542, which will take effect January 1, 2001, amends California Unemployment Code Section 1088.8 in order to correct a drafting error in that section. Under existing law, all employers are required to report newly-hired employees ("new employee registry") to the EDD for child support enforcement purposes. When the language from the new employee registry statute (California Unemployment Code Section 1088.5) was copied into California Unemployment Code Section 1088.8 ("independent contractor registry"), the clause providing for penalties for violation of the reporting requirement was omitted. The new law will apply to violations of the independent contractor registry the same penalties as apply to violations of the new employee registry.

To Whom Will the Law Apply?

The new law will require businesses or other entities ("service-recipients") who are receiving services from independent contractors ("service-providers") to report to the EDD the compensation paid to the independent contractors.

An independent contractor is defined as an individual who is not an employee of a business or government entity and who receives compensation or executes a contract for services performed for that business or government entity either within or outside of California.

A service-recipient is any individual, person, corporation, association, or partnership, or agent thereof, doing business in California, or deriving trade or business income from sources within California. A service-recipient also includes the State of California or any of its political subdivisions.

Service-recipients will be required to report all independent contractors, regardless of where they live or work, using a form provided by the EDD. Thus, if a California entity enlists the services of an independent contractor who lives in California but works in New York, the business must report the independent contractor to the EDD.

Procedures For Complying With The Reporting Requirements

Under the new law, the service-recipient will be required to report information concerning the identity of and payments to the service-provider within twenty days of either making payments totaling $600 or more, or entering into a contract for $600 or more with an independent contractor in any calendar year, whichever is earlier. If the service-recipient is unable to determine when total payments made equal or exceed $600, it may estimate the dollar amount of the contract and report the income to the EDD as "ongoing."

Specifically, the information that must be provided with regard to the service-provider is his name, address, social security number, start and expiration dates of the contract, amount of the contract and whether it is an ongoing contract. In most cases, the information that must be provided concerning the service-recipient is its federal Employer Identification Number, California Employer Account Number, Social Security account number and its name, address and telephone number. However, service-recipients who are not registered with the EDD will not be required to register and receive a California Employer Account Number solely for purposes of reporting independent contractor service-providers. Instead, unregistered service-recipients will be required report the necessary information using their Social Security and federal Employer Identification Numbers.

Penalties for Failure to Comply With Reporting Requirements

The EDD may assess a $24 penalty for each failure to comply with the reporting requirements within the required time frames. A $490 penalty may be assessed for the failure to report independent contractor information if the failure is the result of conspiracy between the service-recipient and service-provider.

What Effect Will The New Law Have?

By assisting in the location of parents who are delinquent in their child support payments, the amended California Unemployment Code Section 1088.8 will be a valuable tool in preventing parents from continuing to avoid their legal obligations to provide needed financial support for their children. While the enforcement of child support obligations is the stated purpose of this amendment, employers should be aware that there could be unintended consequences as well: the new reporting requirements could assist the EDD in identifying employers who are mischaracterizing employees as independent contractors for purposes of state unemployment compensation and other employment-related taxes.

For further information about compliance with the new reporting requirements, please contact any of the attorneys in our San Francisco office.