Paying “Under the Table”

“I occasionally pay people under the table when I have them participate in a working interview for 1-2 days before I decide whether or not to hire them. Once in a while, I also pay under the table when an employee is doing a different job for me on the side. Is there a better way to handle these situations to take away my risk?”

Your HR Survival Tip

Paying workers “under the table” means you are handing them cash and neither of you is reporting it (yet). There isn’t a way to take away your risk because what you are doing is illegal.

If your interview process includes having the candidate follow someone around for 1-2 days (shadowing) or actually performing the job for 1-2 days, this is compensable time. Paying this person cash instead of adding them to payroll could easily create problems for you. Yes, adding the person as an employee is more work than not doing it but that’s because you are only looking at the moment, not the long-term.

In the long-term, you need to look at a potential EDD audit because one of those people added you as an employer when they filed for unemployment. Whoops, EDD doesn’t show that person listed as one of your employees so they decide to audit you to see who else hasn’t been reported.

Your employees may have skills not needed for their usual job. However, you’ve realized one of those extra skills has value to you. The employee is happy to offer that skill in the off hours so their regular job isn’t affected with this new work. However, that other skill doesn’t make them an independent contractor… legally, it makes them an employee who is probably working more than 40 hours per week for you and isn’t being paid the overtime pay they legally deserve. Even if you pay the employee more for the extra work, unless you process the payment through payroll, it is illegal.

What happens when your employee hears from a friend that they should have been paid overtime for the off-hours work. Not one to turn down additional income, they file with the Labor Commissioner to get their money. Whoops, you just got stuck paying the employee’s taxes on that amount and then you hear from EDD and IRS about unpaid payroll taxes. You can pay an employee a different rate for hours spent working that use different skills but overtime will still apply and must be calculated based on both rates.

Don’t think your situation is a special case… EDD will win that argument. If you are not processing every penny you give a worker through your payroll, you are taking a risk. Also, pretending the person is an independent contractor adds to the risk unless they have an actual business offering that service to multiple clients. In the long-term, you’ll definitely spend a lot more time and money defending any claim than you would have spent by adding that person to your payroll and staying legally compliant. Plus, yikes, these governmental agencies might add you to their watch lists!


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