The VCSP Criteria

I can’t help but be sarcastic when speaking of this new plan.  I want to believe that the IRS had good intentions when this was being created.  Asking that the employer pay a small fraction of the cost on a worker who should have been an employee rather than an independent contractor is beneficial. Unfortunately, where the plan loses its luster is within the plan’s accompanying guidelines and how the IRS is perceived. To be eligible, the IRS has established a five point criteria which includes: 1) consistently treated workers as independent contractors, 2) have filed all required 1099 forms for workers for the previous three years, 3) Not currently being audited by the IRS, 4) not currently being audited by the DOL or any state agency for worker misclassification, and 5) if you were previously audited by the IRS or DOL, you’re only eligible if you complied with the audit result. And just when you thought that was the end of the criteria, there’s an “oh by the way” as the IRS has full discretion over who it accepts into their plan.

Employers Reluctant to Come Forward

The IRS is an acronym that nobody trusts. There are few people that divulge more information than what the IRS requests. It would have been in the best interest of the IRS to roll out a plan that prohibited information sharing between the IRS and DOL or other state agencies. Unfortunately that language was not included in their plan and because of that, employers will be reluctant to come forward.  Employers who keep abreast of employment news also realize that the IRS is not their primary concern when it involves misclassification. That lies with private class action lawsuits stemming from wage and hour disputes.

Can you trust the IRS?

An employer wants to make amends for the lack of good judgment used in classifying workers as IC’s instead of employees. Sacrificing themselves to the IRS with hopes of getting off easy makes sense. Unfortunately that’s the only thing that does. Without assurance from the IRS that they will not share any information with the DOL or other state agencies, this plan goes nowhere.  Maybe the IRS needs to makeover their reputation before rolling out a plan like this. Until employers can start trusting the IRS, most will say thanks but no thanks to this latest plan.

Independent Contractor usage Targeted

Increased Funds Requested for Enforcement of Misclassified ICs

If approved, the budget would set aside $240 million for initiatives specifically related to enforcing the misclassification of workers as employees rather than independent contractors.  It is not surprising to see this on the budget, given that this provision is projected to deliver $1.3 billion in revenue over just two years.  Some might consider this a worthwhile investment.

While the Department of Labor’s budget request is$1.1 billion dollars less for fiscal year 2012, it would still increase spending for agencies regulating employers. The budget includes the following requests that are specific to worker misclassification:

“In FY 2012, the Department will redouble its efforts to combat worker misclassification by investing $46 million for a multi-agency initiative of OFFCP, the Wage and Hour Division, OSHA, the Office of the Solicitor, and the Employment and Training Administration, which will fund state grants that address worker misclassification within the context of the unemployment insurance program.  This initiative will help level the playing field for employers who abide by the law and provide employees with their rightful pay and benefits…”

“…The FY 2012 Budget Request includes an increase of $24,711,000 for an initiative focused on establishing capacity to address misclassification within the Federal/state administered Unemployment Insurance program. The first component, which was included in the FY 2011 Budget, which would provide states with the opportunity to compete for grants to: increase their capacity to participate in data sharing activities with the IRS and other Federal and state agencies; implement targeted audit strategies; establish a cross-state agency task force to target egregious employer schemes to avoid taxation through misclassification; and to develop education and outreach programs.”

Incentives to Enforce Misclassification

Larry the cable guy was hired by RCN as an independent installer where he happily worked for years.  Suddenly Larry loses his job, has no money and then decides to file for unemployment where he is turned down. Seems independent contractors are not eligible to collect unemployment benefits. Larry learns had he worked as a regular RCN employee he would be eligible to draw benefits and receive a weekly pay check. Larry gets an idea and a lawyer who claims Larry was misclassified as an independent contractor when he really should have been an employee.  Larry’s lawyer files suit against RCN on Larry’s behalf and oh by the way several other cable guys who also were misclassified as independent contractors. What started out as a story of one individual who lost his job and needed money quickly turns into a class action law suit thrusting a cable installation company into the hot seat. The cable guy story broke in June 2009.  

It’s now fall and Larry is in the news once again this time suing Comcast Corporation for the same reason he sued RCN; employee misclassification.  Seems Larry had multiple clients err employers in 2009 with RCN and Comcast named as such. This suit is slightly different in that a third party has been added to a complex equation. Triwire Engineering a subcontractor for Comcast is also named accused of bank rolling the payroll for the cable giant. According to Larry he worked as a Comcast installer paid through Triwire from March until August then suddenly fired after TriWire allegedly learned of his suit against his previous employer RCN.  This latest lawsuit against Comcast and Tri-Wire is much bigger than a weekly paycheck. The duo is accused of violating the federal Fair Labor Standards Act and Massachusetts’ independent contractor and overtime laws.  Should Larry win it could mean a lifetime of paychecks! 

With the economy still upside down employers must tread lightly when using independent contractors. Other unsuspecting employers accused of similar misdeeds by copycat contractors include cable giants Cox Communications and Charter along with a multitude of subcontracting entities.

Californians have no choice but to sit back and watch as the financial strangle hold on the state continues to tighten. As unemployment numbers climb to an all time high of 12.2 percent, the economic downturn forces 2.2.million workers onto the unemployment line, continued ridicule of other states over the IOU’s to cover it’s debt I ask you could it get any worse?   

The state known for its financial wealth and a state of plenty must endure yet another  financial hit laden with additional embarrassment.  Earlier this year Schwarzenegger rolled out a cost cutting plan in an effort to save the state some money ordering reduced hours at state offices and placing workers on unpaid time off.  The goal to save money may actually end up costing the state even more!  

Superior Court Judge Charlotte Woolard ruled in a suit brought by the Service Employees International Union which represents the funds of more than 6,300 workers.  California’s insurance code State Fund exempts its workers from furloughs and hiring freezes. The union pointed out the furloughs qualified as a “staff cutback”.  Employees who were illegally furloughed are entitled to back pay plus interest for the days they missed work. The payout could cost the state a whopping $23.2 million. 

The ruling couldn’t come at a worse time for California as it continues to struggle to close a $24 billion dollar deficit.  Sadly enough this fiasco may not end here. Officials fear other state workers who were also furloughed may come forward seeking compensation.

Beginning in November 2009 the IRS will launch its latest National Research Program (NRP). This NRP will be focused on conducting employment tax audits.

Of the 6,000 employers unknowingly entered into the IRS lottery 2,000 of them will be declared winners in 2009.  The grand prize?  Fines, penalties and plenty of bad publicity. These unlucky employers up until the moment they are officially notified have no idea they have been entered into this audit sweepstakes.  They were randomly selected by the IRS and with any luck will come out of the audit only slightly bruised. 

Basis for these audits?  The U.S. Treasury Department released a study on the U.S. “tax gap”; the difference between taxes owed and taxes not paid by tax cheats. Who are they? They are employers who underreport, underpay or simply never file. The Treasury estimates a tax gap of $345 billion and the IRS views the gap as justification for the audits.

What is your plan of action should your number be declared a winner?

Looks like Larry the Cable Guy has company. Communications companies are being bombarded with worker claims of unpaid overtime , worker misclassification and unlicensed workers. Joseph Valdez, cable installer filed a lawsuit against several cable giants claiming he was cheated out of unpaid wages. Attorneys for the plaintiff have accused the cable companies of worker misclassification and unpaid overtime. The overtime claim is not warranted in a case where the workers were hired as independent contractors. Is this a clear cut case of employer intentional misclassification paying the workers as independent contractors to avoid employer obligations? Perhaps it’s a simple case of misinformed cable companies duped by its sub-contractors providing the installers. Often a company finds itself in the middle of a legal dispute due to ignorance of the subcontractor’s actual relationship with its workers. These companies enter into an arrangement with the subcontractors under the impression the workers are paid as employees after all the contract prohibits them from supplying 1099 contractors. The unsuspecting company is totally unaware of any misconduct. Typically an organization will engage a subcontractor and assume they operate a legitimate business.  Only when a worker files a complaint against the subcontractor do they become painfully aware of a bad employment arrangement and stuck in the middle of a hellish nightmare!

In June a former cable installer filed suit against RCN Corp. claiming he was an employee and not an independent contractor. Fritz and more than 1,000 other U.S. installers are paid as “independent contractors and recognize this arrangement has ripped them off for years.  They claimed they have been deprived of overtime and other employee benefits enjoyed by RCN employees.

An unsuspecting business can sidestep these types of legal problems by taking time to run a thorough check on its subcontractors. A couple of phone calls and a few hard hitting questions about its hiring practices may turn out to be time well spent! 

Why would an employer intentionally misclassify a worker and how would they benefit from this practice?