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.

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.

“When employees are classified as independent contractors, whether by design or because the rules are unclear, they are denied access to critical benefits and protections, at significant cost to government at all levels,” said Vice President Joe Biden.  He applauded senators Kerry and McDermott for introducing the bill, as stopping worker misclassification is a priority for the President’s Middle Class Task Force.

Senator Kerry released a press release with additional details regarding this bill and its goals. 

The Fair Playing Field Act of 2010 will:

• end the moratorium on Internal Revenue Service (IRS) guidance addressing worker classification;

• require the Secretary of Treasury to issue prospective guidance clarifying the employment status of individuals for Federal employment tax purposes;

• amend the provisions of the Tax Code that provide for reduced penalties for failure to deduct and withhold income taxes and the employee’s share of FICA taxes;

• require persons who contract independent contractors on a regular and ongoing basis to provide a written statement to each independent contractor of the Federal tax obligations of independent contractors, the labor and employment law protections that do not apply to independent contractors, and the right of the independent contractor to seek a status determination from the IRS; and

• require the Secretary of the Treasury to issue annual reports on worker misclassification.

This bill comes in the wake of last year’s Taxpayer Responsibility, Accountability, and Consistency Act of 2009, and this year’s Employee Misclassification Prevention Act; both targeting this specific issue of independent contractor misuse.

Be sure to check out the article featured in CNN Money today regarding independent contractor misclassification and the related crackdown. The article forecasts the eminent audits and governmental attention the issue is receiving.  The article however does not delve into the dangers of class action lawsuits – a potentially devastating side effect of misclassification.

Another Pitfall of Misclassifying Workers

While audits are both distracting and disruptive to businesses, class action lawsuits have the potential to become more costly, both in terms of dollars and image.  As class action lawsuits play out in court, they receive a great deal of media attention and scrutiny from various audiences (take the FedEx suit for instance). The related court proceedings may last for months or even years.  Even with a favorable outcome, this type of suit is not productive for business.  Add labor unions (with their interest in workers being dues-paying members) to this mix and you are in for one compliance cocktail that may be difficult to swallow.

The Usual Suspects To Share Scrutiny Soon

For now, the main spotlight appears to be in the construction and transportation related industries, including cable installation and trucking.  If you operate a business which relies on drivers, chances are you have caught wind of this.  This is not to say any industry is safe.  Misclassification cases have been seen throughout nearly every industry from baby gear manufacturers to adult entertainment venues. Clearly, given the FY11 budget and section 9006 of the recently approved healthcare bill, the government intends to expand enforcement.  I personally foresee a rise in both misclassification and wage and hour claims within the healthcare and IT industries within coming years.

Be sure to read the section on freelancers, an often controversial and murky topic for contractor classification.  What are your thoughts on freelancers with regard to contractor versus employee classification?  Your comments are welcomed below.

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.

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.

No money to conduct random audits? Are furloughs wreaking havoc on your ability to deploy auditors?  One state finds a creative way to uncover a few employees and drum up payroll taxes simply by advertising free self-classification classes! 

 Iowa Workforce Development is advertising assistance with proper worker classification to contractors. Just think in one hour you too can become an expert in worker classification.  You will learn how to tell the difference between an employee and independent contractor and determine if you are properly classified!  The goal at the end of the class is to make you an expert and help the state reduce the number of misclassified workers in Iowa.  “Getting the classification correct is critical for tax, wage, unemployment, workers’ compensation and other employment issues.   Getting it wrong can cost an employer$$”.

This offering is just another example of what lengths the states will go to in order to demonstrate the renewed emphasis of enforcement by federal and state regulators.  Misclassified workers step forward to be reclassified; employers are identified then fined resulting in a new flow of future payroll tax revenues.  What a great way to get the cash flowing into the state and federal governments empty coffers!