Target: Safe Harbor

The Fair Playing Field Act of 2012 was introduced in the House (HR.4123) as well as the Senate (S. 2145) and their targets are the same…Section 530, Safe Harbor.  Section 530 of the Revenue Act allows protection for an employer who misclassifies workers as independent contractors if the employer has a reasonable basis for doing so.  By doing so doesn’t just mean that any employer can get away with misclassifying its workers as independent contractors.  An employer must be able to reference an industry practice, court rulings or past IRS audit and never have treated the misclassified workers as employees in the past.

No More Hiding Behind Safe Harbor

The bills would permit the Secretary of Treasury to issue prospective guidance clarifying the employment status of individuals for purposes of employment taxes and to prevent retroactive assessments with respect to such clarifications. No longer would employers be able to hide behind 530 as a basis for misclassification. Also, the IRS would not be able to fine employers who classified their workers as independent contractor retroactively as long as the employer treated their workers as IC’s and filed 1099’s for the years, for the workers in question.

Same Legislation From 2010

Since the same legislation was introduced in 2010, I question why these two bills were introduced this far along in the congressional session. I understand that independent contractor misclassification is a hot topic right now but why not introduce it sooner?  Would it have been overkill if they were introduced last year with other legislation (Payroll Fraud Prevention Act and Employee Misclassification Prevention Act of 2011) aimed at curbing worker misclassification? Or are politicians in the Senate and House just meeting their misclassification legislation quota to show that they really do care about leveling the playing field?  Personally, I still think a bill aimed at curbing the NY Yankees payroll would have more appropriate for the title of the legislation.

Please check back with us as we offer updates on these bills.

California Is On A Roll

The memorandum is just the latest effort from California to tap a potential revenue stream and cripple the underground economy that involves misclassifying workers as independent contractors for purposes of not having to pay minimum wage, workers compensation, benefits and employer taxes.  On January 1^stof this year, California introduced SB 459which prohibits the willful misclassification of individuals as independent contractors and allows the Labor and Workforce Development Agency to assess specified penalties (upwards of $25,000) to those employers who break the law.

CA Wants Their Money

California is the twelfth state to sign the MOU with the Department of Labor. If you’re an employer in California, you’ve just been put on notice that the state does not have any intention of letting up when it comes to audits…..they want their share of the revenue!

The US Supreme Court is currently reviewing a misclassification suit by pharmaceutical sales representatives who claim they were denied overtime by being misclassified as Independent Contractors. This case could have far reaching implications as it will send a message out to many outside sales representatives that they also may be entitled to lost overtime wages and potentially other benefits they may now be retroactively entitled to. . . in the form of a healthy payout. One question before the United States Supreme Court is whether the Fair Labor Standards Act “outside salesman” exemption should apply to pharmaceutical sales representatives who promote but do not sell their company’s drugs to physicians.

FLSA May Soon Protect Non-Employees

On a related note, the Payroll Fraud Prevention Act (S.770) would amend and expand the Fair Labor Standards Act (“FLSA”) to include “non-employees” within the ambit of the FLSA minimum wage, hours and overtime protections. This bill is actively being reviewed but has not yet passed.

Staggering $8.1 M Payout to One Plaintiff

In 2009, a Sales Representative of Baby Trend, INC. alleged he was misclassified as an Independent Contractor of the company. An $8.1 million judgement was entered in favor or Robert Gardner(AKA Gardner Marketing Group), after Baby Trend terminated its relationship with Garnder in 2004. Several claims including breach of contract, fraud and others arose out of this termination.  Read more about the case here.

An exotic dancer’s classification is a hot topic since it serves as a potential poster child for what should be an employee even though the “industry standard” dictates independent contractor status. So what’s right?

Relationship Details

Before we draw any conclusions, let’s examine some of the details of the relationship. Dancers earn their money per shift.  A large majority of their income is derived from tips, of which the dancers have to pay a percentage back to the club to cover the dj, bartender, etc.. Gentlemen’s clubs typically control the hours that a dancer works.  In addition, the dancers are required to dance on stage several times as part of their shift along with providing extra friendly mingling services to customers. Though it is possible to work for multiple clubs simultaneously, most clubs prohibit their dancers from doing so.

I’ve laid out a few factors involved in a dancer’s relationship with their club. For those that didn’t notice…control, control, control dominated the relationship between both parties. But what’s it going to take for their IC status to be overturned? That’s the million dollar question.

Will anyone listen to the dancer’s claim?

The dancers have an uphill battle in front of them. There have been instances in other industries where workers have called attention to themselves with the hope that either a state or federal government would pay attention. And in those instances, the response from the government has either been discouraging or non-existent.  Whether these numerous cases make it to court depends on how aggressively the dancers and their lawyers are willing pursue employee status. After all, should the dancers be rewarded with employee status, changes are likely to occur with regards to income as well as the taxes they will now be responsible for.

We’ll continue to monitor whether the courts view exotic dancers as a labor group worthy of a legitimate employee occupation or whether they’ll continue to stay as industry standard independent contractors. Count me in as one person who is eagerly waiting for this legal dance to take center stage.

The bill is the latest effort from Congresswoman Woolsey aimed at tackling the worker misclassification problem. She had previously sponsored bills in the last two congressional sessions that were introduced but did not clear the committee stage.  This latest action is the second congress sponsored misclassification bill to be unveiled this year. The first was S. 770, The Payroll Fraud Prevention Act which was introduced in April.

Previous Attempts Have Failed

Congress’ previous attempts at fighting worker misclassification have failed with bills that were created late in the sessions. In turn, the late start made it impossible to garner enough steam to make it through the legislative process. With H.R. 3178 and S. 770 being introduced earlier in the session, there is optimism that these bills will not follow the paths of their predecessors.  Not only is the early introduction helpful in pushing these bills along but awareness around misclassifying workers has recently heightened with the IRS and various states taking action on the matter.

You have to credit Congresswoman Woolsey for being persistent in trying to properly classify independent contractors.  In doing so, she’s made it known that she’s fighting for workers’ minimum wage, overtime and worker’s compensation rights.  Not to mention tapping into a revenue stream with huge potential.  Whether or not Congress views it in the same manner depends on whether the time is right to roll out legislation that could potentially hinder job progress in a struggling economy.

Unfortunately we won’t know the outcome of this latest bill until the end of the legislative session but please continue to check back with us as we post updates.

 Scarlet Letter

Financial penalty is not the only form of punishment employers will have to endure. Those found guilty of violating the law must also display a notice to the employees and general public stating the details of the violation. The notice must be signed by an officer of the company and be posted on the employer’s website or place of business (if the employer has no website) for one full year. Hester Prynne, is that you?

Job Killer Act

When yours truly blogged on this bill last month, I didn’t think that it had the slightest chance of passing. After all, people were calling it the “Job Killer Act” and unemployment in California was at 12.1%.  Not to mention, there was  no way that the  Governor would approve a bill that brands those who break the law. Apparently Gov. Brown didn’t pay any attention to the frivolous chatter when he put his pen to work and signed the bill. 

Employers have to pay attention to how they classify their workers

The California Labor Commissioner is out to make an example of businesses that make a practice of cheating the system. Construction industry can you hear me? Though this bill does not specifically name that industry, it’s not hard to read between the lines and understand for whom this bill is intended. However anyone outside of construction, I don’t recommend testing your fate. When this legislation officially becomes law in January, employers will finally have to pay attention to how they classify their workforce or face the consequences.

Misclassification Risk: An IC Phenomenon

Independent Contractors are self employed individuals or small businesses who provide services to multiple clients, under minimal direction and work “independently” or free from excessive control.  When companies use Independent Contractors, it is critical that the client-business respects their independence, and engages with them in a proper manner–as not to cause any question on their independent status.  Most often, troubles arise when a former Independent Contractor comes upon hard times and files for unemployment after their services were terminated.  The state receiving this unemployment claim will begin an investigation, and the client company will be subject to costly fines and penalties if it is determined that the worker should have been classified as an employee.  Typically, when a misclassified worker is found to be an employee for workers’ compensation purposes, the client company will then be audited to determine if other alleged Independent Contractors were also misclassified.  This audit window will likely encompass three tax years (or more if fraud is suspected).  If  widespread misclassification is found during the employment audit, you can see how substantial fines, penalties and interest can add up… all resulting from just the initial worker. An unemployment claim by a worker is only one of many triggers that may cause a company to find an auditor knocking at their door.

Coemployment: Multiple Employers to One Employee

Coemployment involves the sharing of employer responsibilities between a client and a professional employment organization (PEO). The payrolled worker is the employee of the PEO, but is actually providing direct services to the client of the PEO. This service offering is helpful to the client because it provides the opportunity to utilize temporary labor without having to hire-on permanent employees. This relationship is mutually beneficial, with the PEO company receiving a small mark-up on the worker’s pay and the client having a flexible and salable workforce at their fingertips without having to take on the burden of benefits and paperwork for these temporary workers.

It is essential for both parties that all performance related issues and/or Human Resources issues are handled by the actual employer of the worker. Especially when temporary workers reside onsite and often use equipment provided by the client, remembering to differentiate between employees and temporary workers becomes important.

When temporary workers are used indefinitely, and treated much the same as other permanent employees (invited to staff meetings and events, given awards or incentives, included on all-employee emails) by the client, coemployment risks are heightened. The worker may feel slighted for not being included in the same benefits packages, or may resent some practices of their employer.

So What’s Worse?

Coemployment and IC Misclassification pose unique risks to companies that improperly engage workers.  While either practice possesses a unique type of risk, it’s hard to dispute that IC Misclassification provides more headaches to companies nationwide.  Until Coemployment garners the attention that IC Misclassification has received in recent years, companies would be well advised to focus primarily on their 1099 workforce, while also ensuring they have selected a worthy payroll provider to mitigate coemployment issues.