Independent Contractor Compliance Blog

TEMPLE CITY, CALIFORNIA-The IRS does not discriminate when it comes to IC Compliance and the proper classification of workers.  The Pasadena Star News, reported on October 23, 2008, that Temple City, a suburb of Los Angeles, had been flagged by the IRS for improperly treating full-time employees as Independent Contractors.

Further investigation revealed that Charles Martin, City Manager, was one of the problem areas for this audit. The IRS determined that since taking over the dual roles of city manager and city attorney in 2005, Martin has been improperly considered an Independent Contractor instead of as an employee. The Pasadena Star News reported this allowed the city to avoid providing medical, dental and retirement benefits and “…to pay him less than it might otherwise have to…”

The IRS found the city also did not to pay or withhold any payroll taxes on the city manager’s behalf, or on several other classifications of city workers that the IRS found to be improperly classified.

The Star reports Temple City may be fined $50,000 by the IRS for these misclassifications.

The costs will be more than $50,000 when it’s all over.

Remember the possible $100 million administrative costs I’ve reported to you several times for Fed Ex to change over its system in just California? Well, Temple City will also encounter administration costs to change over-maybe not as large, but it will cost them some money.  Also, there are other costs Temple City will need to address.

• Legal fees
• Paying retroactive employee benefits such as:
  • Health care
  • Retirement
  • Dental
  • Overtime
  • Vacation time
• The time spent dealing with all these conflicts is time not spent operating the city…
• Other enforcement agencies may climb on the band wagon, wanting their share.

It all adds up and this story illustrates that no one is exempt from the proper classification of IC’s and employees. The city apparently did this to save money, but in the long term it’ll cost them more than had they done it right from the start. They should have hired an expert to come in and advise them before trying to make people IC’s.

If the city had attorneys on staff, why didn’t they get it right?

Well, in my not timid opinion, they were obviously not experts in this area, or maybe they thought a city was exempt from the law. Just because someone has a law degree does not make them an expert on the common and statutory laws involving employee and Independent Contractors. You need to engage a real expert to do this for you.  Don’t depend on a part-time hobbyist or what I sometimes refer to as a Weekend Warrior to protect your business.