The Compliance Wire

Does this come as a surprise?

During his days as a senator, now President Barack Obama introduced legislation to congress targeting worker misclassification several years ago.  Other proposed legislation was introduced to congress, but seemed to die on the vine.  Since his election, many have kept a watchful eye on new bills from DC, anticipating activity focused on worker misclassification.

Momentum is Building… Are you prepared?

Upon review of the fiscal year 2011 budget , allocation of funds provide a clear indication of the federal government’s intention to take a closer look at this topic. The budget includes a proposal to combat the misclassification of employees as independent contractors by “eliminating incentives in law for employers to misclassify their employees” by modifying the safe harbor provision. Additionally the budget allocates $25 million towards the Department of Labor to target misclassification, calling for 100 additional enforcement personnel to address the issue.

Low risk service types — do they exist?

In recent employment tax audits, cable installers, actors, ground-service delivery drivers, and even exotic dancers to name a few service provider types have raised a red flag with the ever so watchful IRS. So what specifically, about these service providers  rocked the IRS’s boat?   I am sorry to say that there is no definite answer, as many are the factors that will weigh in risk wise, when paying a service provider as an independent contractor. Besides,  judging by one of Massachusetts’ recent (and über strict) guidelines, one safe bet is to only engage contractors who perform services that are unrelated to your usual or core business functions.

Who controls how the worker does the work?

Businesses with a lower appetite for risk should keep in mind that 1099/Independent Contractor compliance risk mitigation will more than likely have endless shades of grey when discussed with an IRS auditor. Nonetheless, most experts will agree that it truly boils down to the amount of control that a company has over the “Independent Contractor” as well as the amount of investment that the individual has in their business.

The control factors that will tip the scale and point toward an employee type of relationship are commonly known as behavioral control.  The IRS states that behavioral control refers to facts that show whether there is a right to direct or control how the worker does the work.  The items below may be interpreted as control factors when it is the business that determines them for the worker:

• When and where to do the work
• What tools or equipment to use; especially if the equipment is provided by the business
• What order or sequence to follow when performing the work
• Attend staff meetings
• The services are provided onsite at the business’ location
• Degree of instruction
• Training.

A worker is an employee when the business has the right to direct and control the worker.

Amount of Investment in the Business

In contrast, the amount of investment a person has in his or her business will also weigh in to the IRS’s assessment.  Investment in business, meaning, what steps has the independent contractor taken to differentiate themselves from an employee and substantiate their status.

To preserve your IC status, a legitimate independent contractor should consider these basic items to avoid being reclassified as an employee:

• Make services widely available (business card, website, vs. word of mouth)
• Have multiple clients
• Work off site
• Obtain all necessary licenses/permits

Take into account that no specific factor (behavioral control, financial control, or type of relationship) will solely offset the IRS worker classification scale the next time your business decides to categorize a certain service type as “low risk”.  As the cable installers, actors, ground-service delivery drivers, and exotic dancers await a ruling on their cases, the IRS will continue to suitably weigh in all the details and formulate a decision based on the overall blend of these factors.

The truth about 1099 contractor use from an insider’s perspective:

On any given day, dozens of phone calls are fielded from businesses wanting to know the appropriate classification for their workers. In a time of economic hardship, many companies are turning to independent contractors to fill voids during an unforgiving budget crisis. These proposed ‘independent contractors’ will sometimes have a desk, name placard, computer, phone with client supplied voicemail, and many other employee like resources. A common thread among the hiring companies is the assumption that if the worker believes themselves to be an independent contractor then it must be true. The truth is that while the relationship may seem valid at the time of engagement the amount of control often begins to increase as the term of the relationship lengthens.

It has been a difficult fiscal year for many workers, independent contractors being no exception. For many small businesses, work is hard to come by, so when a good opportunity comes along for a long term contract many independent contractors are jumping on it. There is a chance that an alleged 1099 worker is actually hoping to gain full time regular employment, which would include employee benefits. In fact, a recent article published in New York Times  indicates that labor data is showing a surge in the hiring of temp workers, extended hours for part time workers, and the use of freelancers. Freelancers are a great example of workers who are typically considered 1099 independent contractors, though not guaranteed this status in the eyes of the IRS.  The question becomes, is this individual acting as such?

Can 1099 Contractor Use Save My Budget?

In a time of economic uncertainty many companies are willing to become gamblers. How significant are the consequences in relation to risk? This depends on how much time, money, and resources a company has and is willing to use to fight a reclassification case. A feasible solution for organizations would be to make an effort in controlling their IC population. Proper usage of these workers can save a great deal for client companies, while improper use may warrant fines, penalties or even full blown audits.
Be aware of who is coming and going. Without a doubt, verify the relationship at some level even if that means collecting some basic business documents from the contractors such as advertising/marketing materials, business expenses, and a business license. While these steps will not guarantee protection, they are at least a step in the right direction. What will your company’s New Year’s resolution be?

Let the crackdown begin!  As many of you have heard, and as Katya previously mentioned, the IRS is planning to step up enforcement efforts and employment audits around misclassified workers, and increase  penalties for such offenses. 

Increased 1099 Awareness May Lead to Private Right of Action

Something to consider: More and more 1099 workers are hip to this crackdown and are reevaluating how they are being treated and classified by their ‘clients’. A case filed for $200 million against Northwestern Mutual Life Insurance Co. by a few of their independent contractors involves action on behalf of the workers.  They are claiming that they were misclassified and were being treated as employees without receiving minimum wage and overtime pay.  As this trend is spreading, and the word is getting around, my advice is to beware and revaluate the relationship you have with your independent contractors.  Here are a few Helpful Hints to help protect your business:

Three main factors that can help you protect yourself from a worker misclassification suit or employment audit: 

The first one is to do a bit of research on the Contractor you are engaging. 

• Do an internet search on them; see if they have a website, are they incorporated, and are they paid on a Federal Tax ID Number.  These are just a few hints that indicate a significant investment in their business.  These items also help to demonstrate an independent business and thus independence from your business, which is what you want.

The second is to review your relationship with the Contractor.  The big issue to concentrate on is CONTROL.

• The only thing that should be approved by you is the end result.
• Do you have to train them?  There should be no training involved.  The reason you are engaging a contractor should be for their specific expertise.
• No financial control!!  A true business or contractor should have the opportunity to realize a profit or loss.
• The independent contractor in most cases should not be using your equipment, email, voicemail, or representing your company. Separation is key!

The third component would be to review the contract and relationship between you and the Contractor. 

• What is the contractor’s expectation of the relationship? Is this going to be his main gig and source of livelihood? Or are you just a short stint among his other clients?
• How are the payments laid out?  Avoid hourly, bi weekly, and “expense reimbursements.”  This is how an employee is paid.  A contractor should be paid upon deliverables for a specific project, with all associated costs factored into their overall total.
• A project should typically not extend beyond a year.  Make sure to have set start and end dates. If you need this individual longer than a year they might become an integral part of your business and should be hired on as an employee.
• Verbiage!!   Any employee- type verbiage such as “as needed,” “managing a team,” “training,” “reports to” is verbiage indicative of an employee relationship.  The PROJECT should not be mistaken for a JOB DESCRIPTION. 

These are just a few of the ways you can review how you are doing business with 1099 contractors, and a way to protect yourself.  Of course we always recommend that you seek a professional service if you tend to utilize a high volume of contractors, such as WorkforceLogic!

Tax Audit Results in Misclassification Penalties

The IRS is calling on the city of Pine Bluff, AR, or rather auditing and assessing fines on the city’s 2007 payroll and contractor taxes.  There is currently a $63,803 price tag on the initial assessment which the city hopes to minimize.

City Contractor Use Not Safe From Federal Scrutiny

This audit is one of many being done at the city level by the IRS. Recent city audits of misclassified workers include Santa Fe, NM and Atlanta, GA who has taken steps to correct the issue.  It may be worth looking into the correct classification of their workers for many city governments; if not to prevent fines, to prevent bad press and potential headaches from union guilds.

As most businesses are aware, the IRS is launching a massive employment taxes audit in 2009, and much has been discussed regarding whether or not these businesses are ready to successfully survive the audit and avoid substantial penalties.  Businesses are implementing proactive approaches on how to prepare for this type of audit, and are cautiously assessing what amount of risk they are willing and able to take on when working with independent contractors, especially considering that proper worker classification will be a highly scrutinized item included in the audits.

Businesses are being selected, and will be audited; this is a given. Consequently, this means businesses will more than likely be more selective and conservative with those small businesses and individuals they chose to contract out to. Furthermore, due to the current economic crisis, many businesses have placed a stop on spend when it comes to engaging vendors and independent contractors.

So what does this really mean to you, the business seeking Independent Contractor? What should your game plan include to ensure that you are able to continue to do work, and more importantly, be selected to do work with these businesses that are being targeted? It means your business structure and manner in which you engage with these businesses must be at its best so that your client feels confident in your 1099 classification.

Regardless if you consider yourself a consultant, freelancer, or self-employed, the IRS will fit you into either one of two tax filings: an employee (W2) or a 1099 (Independent Contractor).

Now is the time to put those essential business tasks into action that as a busy person you may have put on the back burner. Items such as: determining the legal structure of your business (sole proprietorship, partnership, LLC, corporation, etc), registering your business name , obtaining any necessary business license and permits, and obtaining a tax ID number among others  that will strengthen your status as a legitimate independent contractor so when that feared audit comes around, you/your business will not be a red flag to the IRS, and one less worry to your client being audited. Furthermore, once the audit has passed, and businesses revamp their independent contractor/vendor selection method, chances are your business will be in good standing to be selected for further work.

FedEx prepares to do battle with yet another opponent in the war on worker misclassification. 

On Tuesday the Attorneys general from New York, New Jersey and Montana issued a letter of warning to FedEx regarding its current independent contractor driver model.  If FedEx would not abandon its current independent contractor model for home delivery drivers they would be forced to bring suit against the shipping giant. 

The letter contained harsh accusations like “blatantly misclassifying its drivers”; FedEx Ground has denied these individuals the employment rights guaranteed by law. Practices which would support the allegations of worker misclassification and cited by the AG’s; the work performed is a core competency of FedEx Ground, drivers integrated into business functions of the company, determines the hours drivers work, how they load and deliver packages, and limits the drivers ability to compete other employment. The inability to work for the competition clearly creates financial dependency on Fed-Ex similar to that of an employee.  

More than 1,000 drivers would be impacted by the changes should FedEx cave in under the pressure from this powerhouse. FedEx must respond with a decision by October 27, 2009 a deadline that is fast approaching.  Should Fed-Ex disregard the letter the AG’s will have little choice but to file suit. The AG’s are confident they would win the suit based on its findings during the investigation of FedEx worker practices. According to the AG’s there is more than enough evidence of worker misclassification. 

The suit is being called a “multistate effort” and this is not the first time this issue has come up with Fed-Ex. Earlier this year in June attorneys general from six other states wrote to FedEx Ground, demanding changes to the existing driver model. States are teaming up forming a task force in hopes of pressuring FedEx Ground to change its driver business model.