Hired caregivers (also known as home care aides) permit many California seniors to remain in their homes as they age and need assistance with activities of daily living. Yet from my window looking out at Sacramento, I can see massive liability associated with the classification and payment of such workers. Consider that baby boomers are now entering their 70s and a 75-year-old American has a life expectancy of 12.2 years. A growing number of seniors will need help.
Let’s say Dad has advancing dementia, perhaps caused by Alzheimer’s disease, and needs round-the-clock caregivers to help with cooking, cleaning, toileting, and dressing. His daughter, perhaps as agent under his power of attorney or as a trustee of his trust, hires a home care agency, at a rate of $25-plus per hour, to provide multiple shifts of caregivers. Then one of the caregivers offers to work directly for Dad (and to bring in others to do the same) at a straight hourly wage of $15 per hour. This could save $250 or more per day, which will add up quickly as the weeks pass.
What’s wrong with this approach? Federal and California law likely treats caregivers as employees of the elders they serve. If the elder’s family ignores the assorted legal requirements associated with the employer/employee relationship, the elder (or his beneficiaries when he dies) may face hefty liability on two fronts. As we’ll briefly discuss below, tax authorities may seek taxes, interest and penalties. In a later post, we’ll explain how caregivers may sue for unpaid overtime and failure to provide meal and rest breaks – indeed, California law encourages such suits by awarding legal expenses to prevailing plaintiffs.
If Dad hires a home care agency, can he avoid becoming an employer?
Yes. The simplest way to avoid the complexities of becoming an employer is to hire a licensed home care agency to select, schedule and oversee the individual caregivers.
In 2013, the Legislature enacted the Home Care Services Consumer Protection Act, now codified at Sections 1796.10 to 1796.63 of the California Health and Safety Code. Effective January 1, 2016, the Act requires “home care agencies” to be licensed by the California Department of Social Services. The agencies may only use licensed “home care aides” to deliver services to customers, and must classify them as employees, not independent contractors.
The new regulation of home care agencies means greater reliability for family members who engage them to provide services to elders, but the compliance costs no doubt will be passed along to consumers. While some consumers have long term care insurance, most will end up privately paying for in home care. Thus, the financial temptation will be greater than ever to hire individual caregivers for less than it would cost to hire a home care agency, and thus cut out the middleman.
If Dad hires caregivers directly, must he classify them as employees?
If families opt to hire individuals to provide care, as opposed to contracting with a home care agency, they must determine whether the workers are employees or independent contractors.
In California, an in home caregiver is likely to be classified as an employee because the family is generally in control of the work environment, including the caregiver’s schedule and rate of pay. Under California and federal law, an employment relationship will be found where the family has control, or the right to control, the job duties that the caregiver must perform and the manner in which those duties are performed. As opposed to an independent contractor, who has the right to control his or her schedule, place of work, and often rate of pay, the caregiver a family hires is usually not as independent. Even if the family signs an agreement with the caregiver in which he or she agrees to be an “independent contractor,” courts look beyond written agreements to the circumstances of the relationship to determine the proper classification.
California’s Employment Development Department (EDD) has issued an information sheet (Form DE 231L) on “Household Employment.” The sheet characterizes caretakers and home health care workers as employees, and categorizes as “household employers” anyone “who has paid $750 or more in cash wages [checks and cash] to one or more household workers in a calendar quarter.”
Hence, if caregivers help Dad four hours or more per week at a rate of $15 per hour, Dad will cross the $750/quarter threshold and likely be deemed an employer.
If we classify Dad’s caregivers as employees, what tax reporting obligations will he have as an employer?
There are many legal requirements imposed on employers in California. For example, if you pay more than $750 in wages to a caregiver employee in a calendar quarter, you must withhold State Disability Insurance (SDI) from the wages paid out and remit the withheld money to the EDD. If you pay more than $1,000 in wages in a quarter, you must also remit Unemployment Insurance and Employment Training Tax payments to the EDD.
Likewise, under federal law, if you have a household employee, you may need to withhold and pay social security and Medicare taxes, pay federal unemployment tax, or both.
Families who directly hire workers should therefore consider engaging a payroll service or other professional to handle the processing of paychecks to the caregiver, in order to ensure proper withholdings and tax payments, along with timely reporting to tax authorities. There are a variety of payroll services targeting the household employee market, which includes nannies and home health care workers. You can shop for payroll services online.
If Dad misclassifies caregivers as contractors instead of employees, what tax liabilities may he (and his successor trustee) face?
Assume Dad has an acquaintance who loyally provides 20 hours per week of caregiving services for two years, but Dad pays her on a straight hourly basis without complying with the tax reporting obligations of an employer. If federal and state authorities discover the failure to report, Dad could be on the hook for back employer taxes, interest and penalties at the federal and state levels. Dad’s acquaintance also may end up owing a lot of extra money if she did not properly pay income taxes.
After Dad passes, the liability remains with Dad’s successor in interest, either the executor of his will or the successor trustee of his trust. If Dad created a trust, his successor trustee will have to decide whether to report and pay the unpaid employer taxes at a time when Dad’s beneficiaries may be clamoring to receive distributions from the trust.
To avoid these problems, it is in everyone’s interest to properly classify the caregiver from the outset. Unfortunately, many families are unaware of their obligations and years may pass before the problem is discovered. By then, it may be quite expensive and time consuming to resolve.