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News about a pending bill to stop worker misclassification continues to spread across the nation like wild fire. The bill heavily laden with strict employer requirements, added hiring red tape, severe consequences for those who get it wrong and get caught has many very nervous. The bill known as Employee Misclassification Prevention Act of 2008 (H.R. 611) is the latest attempt by the federal government to stop improper classification of workers as independent contractors and designed to plug the tax revenue drain associated with improper worker classification.
Should the bill pass employers will need to prepare for more than just a larger tax bill. Consequences outlined in the bill range from existing post audit back taxes with heavy penalties and fines, new class action lawsuits, wage and hour violations and a visit from the state auditor to boot! Employers have been sitting on the edge of their chair since the bill was first introduced in May 2008.
The bill includes rules for state auditing agencies by offering a huge incentive for states to step up its efforts to flush out misclassified workers. The incentive comes in the form of a new Department of Labor's (DOL) certification requiring states to prove the effectiveness of its audit programs and promises to be the catalyst the Feds need to drive more aggressive auditing campaigns at the state level.
The take away from all of this folks... the stakes are high and you the employer will not come out on the winning side. With a tax deficit of about $35 billion in uncollected tax revenues and the IRS is convinced a tax drain exists in the misclassification of workers this can only mean one thing. It will be even more difficult for an employer to prove itself innocent of any wrongful doing in any type of an audit.
The Employee Misclassification Prevention act of 2008 will make it more difficult for employers to improperly classify their employees as Independent Contractors. Looking for labor cost reductions or trying to avoid expensive staffing company mark-ups? Whatever the reason, you do not want to be caught hiring a regular employee on as an IC. While trying to cut your payroll costs, this money saving technique may just turn out to be a very costly move for your company.
According to the New York Law Journal, in an informative and well written article last week, the stakes are higher than ever and the shell game has ended. This noteworthy article provides a year in review of the topic and references several important events surrounding the issue.
The new act is strongly supported by the teamsters (roughly 1.4 million of them) and is sponsored by Democratic Reps. Rob Andrews of New Jersey, Lynn Woolsey of California, Mike Michaud of Maine and George Miller of California
Another update unfolds in the FedEx driver misclassification saga as shareholders take matters into their own hands and file suit against the FedEx board of directors. The plaintiff, Plumbers and Pipefitters Local 51 Pension Fund, alleges FedEx Ground unnecessarily exposed the company to damages through their questionable hiring practices.
The company was initially fined $319 million by the IRS for the 2002 tax year en lieu of classifying their delivery drivers as Independent Contractors while treating them as they were traditional W2 employees. However, after all is said and done, the company potentially may face liability and backtaxes totaling upwards of $2 billion dollars.
A spokesman for the company dismissed the union's lawsuit, calling it frivolous and without merit. Yet, FedEx is currently fighting lawsuits in 30+ states as the result of this dangerous business model. FedEx still refuses to change how it engages these workers and continues to fight sinking more money into the tax dollar battle that has not enjoyed much success.
To date, stocks continue to sink as FedEx continues the battle and the IRS digs their heels in.
With recent shifts in focus towards stricter employee classification enforcement, it is becoming increasingly crucial to evaluate your approach before doing business with independent contractors and small businesses. Here are just a few general tips to consider before engaging in this type of relationship.
Create an agreement that defines a specific and closed-ended project.
This agreement should be detailed enough to define the expected deliverables, dates and total amount of the project. When creating the agreement, be careful to focus on a specific project, which should be filled by a contractor, rather than a general need (more indicative of an employee relationship). The agreement should focus more on the expected outcome of the project and less on the methods of achieving this outcome. Not enough emphasis is often placed on this agreement, which is crucial in defining the relationship.
Use contractors who have already established their business.
It is important to ensure the contractor has solidified their status as a contractor before engaging in an agreement. Expertise and experience aside, new research from the U.S. Bureau of Labor Statistics indicates that most failures of American startups will occur in the first two years of their existence. All it takes to initiate an audit of your company is one former 1099 heading to the unemployment office and filing an obstructed claim.
Avoid immediately rehiring recent your W2 employees as contractors
Paying out a 1099 and a W2 to the same social security number in the same tax year not only signals a red flag out for auditing agencies, it loops back into the topic of engaging with an unestablished businesses. It is best to incorporate a break in service to let the contractor establish other clients and invest in their business. Becoming the workers primary source of income sets the business up for failure and makes the relationship look more like an employee-employer one.
Key word = Independent
Ensure the relationship and work agreement reflect that your contractor is operating independently. IRS and state auditing agencies focus on three areas of concern: behavioral control, financial control and the relationship of the parties overall. This all boils down to control and independence. Review each of these factors and ensure that the independence is being maintained. Ensure the contractor has not become an integral part of your organization and is instead an independent worker who has been utilized to provide a specialized and closed ended project.
For more information regarding employee classification guidelines be sure to visit the IRS website.
Get this, MA just rolled out a law on April 14th directed at wage and hour violators and its packing a hefty price with no room for negotiations. Not even the courts can help, as the punishment for violations is now mandatory. Fines for wage and hour violations have now tripled.
How much more can an employer in MA handle? The state of MA rolled out this new law in response to a 1993 statute overturned by the state Supreme Judicial Court three years ago. As employers braced themselves for a change in legislation, they could not have anticipated such a restrictive law with no consideration for employers who made an honest mistake. The announcement left many employers nervous and scrambling for answers.
Adding insult to injury, this new law now sits on top of a long list of existing complex laws, shifting the role of the employer to one of an investigator or lawyer. Taking a quick run at the list of employment laws in MA, one can easily become overwhelmed by the sheer number, complexity and level of detail of each.
The new statute disregards an employer's good faith to correct the error and has adopted a zero tolerance policy for wage and hour violators. Some anticipate the number of wage and hour claims will skyrocket as well as the law firms handling these cases, as Massachusetts become a target for new lawsuits. This law can be financially devastating to an employer and there is no time like the present to get your house in order.
With no room for error, one can unintentionally be in violation without advanced warning. Even if the employer catches it and makes the correction, the law is unforgiving as the new triple damages law is mandatory. Tighten up any loose ends by reexamining your existing policies and practices and close all gaps or loopholes around your hiring practices. Take a look at your existing worker population to insure they are properly classified. Lastly, when in doubt contact your legal council and know your rights as employer.
This March, class certification was awarded by an Indiana Judge in the U.S. District Court including drivers from 18 states, with California and New York among those states. These two states are very significant because they tend to be the leaders of change with other states often following their lead. Although the class certification was limited to class and sub-class for state laws, the certification did not include FMLA claims. Not all states were granted this motion. Massachusetts, Michigan and Virginia were denied inclusion.
Although a final ruling has yet to be rendered it is important to note the dollars at stake with this move has gone up literally overnight. FedEx risks to lose hundreds of millions of dollars and the number of litigants in this case hovers around 12,000. Think about it... these numbers don't even include what the IRS will assess when it finishes its own audit.
As the rest of the nation watches and waits, the heat is being turned up on FedEx and the dollars climb closer to around a billion of dollars. I can't help but to point out "pay now or pay later". Sometimes it's cheaper in the long run to err on the side of caution and either hire them as full time or outsource to a payroll company.
Seven businesses have been fined by state labor officials who conducted a sweep which included nail salons, day spas and beauty salons all over the bay area. Read more in the full article
Fines were issued for failing to carry worker's compensation insurance, failing to provide itemized deductions for items such as Social Security on paychecks, or both, according to the State Division of Labor Standards Enforcement.
