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    smallbizguy's Avatar
    smallbizguy Posts: 3, Reputation: 1
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    #1

    Jan 13, 2011, 10:01 AM
    Changing from W2 to 1099 Legal Concerns?
    I own small business and use two individuals that do word processing from home for me. At times, things are very busy and sometimes they are very slow. My first processor worked solo for me for two years and was issued a W2 for her services and then I found a backup for her. I never intended for the first one to be considered an employee and only set her up on payroll so we could withhold taxes from her check (per her reqeust). The second processor is much more agreeable to work with and lives out of state. She is set up to receive a 1099 for her services. When I advised the first processor that I wanted to shift her over to receiving a 1099 instead of a W2, she resigned as she said her husband would not allow her to be considered a contractor. Keep in mind she has always worked from home and all of our business is done via e-mail. I am inclined to accept her resignation as she does not work well with the other processor. My quesiton is whether she can seek unemployment against my company if I accept her resignation. Also, is changing her status from a W2 to a 1099 unethical in any way? She worked less than 400 hours last year and was always a contractor in my mind despite putting her in our payroll system to withhold taxes. Thanks for your assitance!
    JudyKayTee's Avatar
    JudyKayTee Posts: 46,503, Reputation: 4600
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    #2

    Jan 13, 2011, 10:13 AM

    In NY, yes, if you attempt to change her status from an employee to an independent contractor she CAN collect unemployment benefits due to a change in the circumstances of her employment. Obviously she will make less money if she is totally responsible for her SS (and other expenses) as opposed to you paying a share as her employer.

    This is not a matter of ethics. It's your company and you can handle payroll, employees and subcontractors in any manner you wish as long as you are in compliance with the law.

    Being a subcontractor in your mind does not change her being an employee on your books.
    smoothy's Avatar
    smoothy Posts: 25,492, Reputation: 2853
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    #3

    Jan 13, 2011, 10:15 AM

    Others will answer, but in most cases quitting a job disqualifies you from collecting unemployment. But as a 1099 you can't collect it anyway as it's a independent contractor (I.E. Self employed). She might be able because you would effectively force her into that decision. And I have appealed and won when I was forced to resign once before under dIfferent circumstances in the state of Virginia.

    As far as converting what ammounts to a part time employee to a 1099 contractor status, it isn't unethical at all. Its cheaper for you, and takes less paperwork for you, time is money. And I assume this is a smaller business.

    Her taxes would increase while yours would decrease as she would be responsible for paying all of her own taxes.
    smallbizguy's Avatar
    smallbizguy Posts: 3, Reputation: 1
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    #4

    Jan 13, 2011, 12:37 PM
    Comment on smoothy's post
    Thanks Smoothy. I put her on the payroll only to withhold taxes and direct deposit. If she resigns, I am hoping she doesn't seek unemployment as I am not asking her to stop working for me or cutting her hours.
    smallbizguy's Avatar
    smallbizguy Posts: 3, Reputation: 1
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    #5

    Jan 13, 2011, 12:39 PM
    Comment on JudyKayTee's post
    Thanks Judy. I just wanted to confirm whether the law would consider this a strongarm tactic or would see that she really should have been 1099 contractor from the beginning. We will see what happens.
    smoothy's Avatar
    smoothy Posts: 25,492, Reputation: 2853
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    #6

    Jan 13, 2011, 12:48 PM

    Any argument she could make is this... she is being force to give up her rights to unemployment or seek another job.

    How a Judge on an appeal might view that in your state will determine if she collects or not. I am just stating there are special circumstances on the general, you can't collect if you quit rule that will allow her to collect... possibly.

    You used to pay the employers share of the SSI and medicare... as a 1099 she would have to pay both parts instead of half. So its really not a lateral move from her perspective. But a pay cut. As well as losing unemployemtn beifits.
    JudyKayTee's Avatar
    JudyKayTee Posts: 46,503, Reputation: 4600
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    #7

    Jan 13, 2011, 12:55 PM

    I've attended these hearings. It appears she's a W2 employee now. She, therefore, if she has the proper time in CAN collect Unemployment. A sufficient change in employment circumstances can and does allow a person to resign and collect Unemployment. (From what I read she's not a 1099 now so she is entitled - please correct me if I'm wrong.)

    The Court (when I have been present) has stated that a change from a W2 to a 1099 is a significant change in income and employment and the Court has awarded Unemployment benefits.

    Whether she should have been a 1099 employee all along is moot - she WAS a W2 employee and that's all that matters.
    dontknownuthin's Avatar
    dontknownuthin Posts: 2,910, Reputation: 751
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    #8

    Jan 31, 2011, 04:42 PM

    I wouldn't worry too much about it because if she only worked 400 hours, may not qualify anyway. You have to work a minimum number of hours and months to qualify for benefits and I doubt she would qualify on that basis.

    Be sure that the job is a proper 1099 job before you reclassify anyone. You can't simply decide on the basis of what you want or what the employee wants - you must properly classify based on the government's definition of a 1099 employee.

    Personally, I'm improperly classified as a 1099 and my employer is taking a huge risk in doing it wrong - if she ever terminated me, I would apply for unemployment on the basis I'm misclassified and she would be held responsible not only for unemployment but also her half of my FICA, and sever penalties, and they'd probably go back and do the same for all the previous people who served in my role.

    But if they are not working full time, they use their own equipment and supplies, they work in their own office, you do not control their hours, do not provide them paid benefits and so on, they are probably properly classified as 1099 contractors and not employees.

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