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.

Bill 2135 expands penalties to businesses that intentionally misclassify workers to avoid paying taxes. No longer would guilty businesses be subject to only civil penalties. Instead, the guilty parties could be hit with misdemeanor penalties instead.

In an attempt to refrain from coming across as a correspondent for Fox News, this new piece of legislation does not come without a few negatives.  First, the automatic penalties for first-time offenders have been wiped out.  Second, the Kansas Secretary of Labor will have the final word on who will be penalized and the amounts of those penalties.

In the Hands of the Secretary of Labor

It appears that the success or failure of this law will be in the hands of the Secretary of Labor’s office.  How does a state anoint an individual and leave it to their discretion to decide whether or not a worker is properly classified. The federal government and other states have agencies that handle these types of situations yet Kansas has decided to rest the verdict on an individual or his/her designee to make that decision.  On the flip side, one could argue that the final determination in any form of audit or misclassification case comes from one individual…typically an auditor or a judge.

Another Blueprint for Fight Worker Misclassification

Kansas should be applauded for its effort in the battle against worker misclassification. Pairing the Kansas DOL and DOR has the potential for good things to be accomplished. After reading some of the commentary regarding this bill, most wish that the final verdict rested in the hands of the departments not the Secretary to avoid any personal agenda. Others hoped that the law would continue applying pressure on first time offenders to prevent them from doing it again. How the law is implemented and enforced will be watched by other states.  It will provide another working example of what tactic does or does not work.

We’ll attempt to provide you with updates on the success of this law as it becomes available. Please check back with us in a few months.

When companies mistakenly classify workers as Independent Contractors, the worker looses access to benefits, overtime and other rights they  are entitled to.   Aside from the workers, both state and Federal governments lose out as well.  Often, misclassified workers fail to realize they are obligated to pay their own quarterly taxes and that these obligations, normally withheld from their regular paycheck, are now their burden to pay out.  In fact, an IRS estimate of the tax gap caused by self-employed individuals (including independent contractors) put this figure at a stunning 20.3 billion.  Given this information, it is no small wonder that 23  states have passed legislation over the past few years targeting this specific issue, and why the Federal Government has allocated an additional 25 Million towards hiring enforcement personnel and providing grants to states to encourage legislation.   

If you are even mildly familiar with this topic, you are well  aware of the government’s vested interest in combating misclassification.  However,  were you aware that Labor unions are actively seeking to unionize workers who feel they have been misclassified as  independent contractors? A coalition of labor unions has been backing legislation to prevent the misclassification of employees as contractors. There are several bills the unions are urging their members to support to fight this type of wage theft, including the Wage Theft Prevention Act, the Fair Playing Field Act, and the Wage Theft Prevention and Community Partnership Act.

Businesses who use independent contractors in fields where unions are prevalent should be cautious of this classification.  In backing this legislation, unions seek to limit this use of ICs and as a result, expose more workers to union organizing.  Labor unions take the stance that worker’s rights are being taken away when they are classified as independent contractors.

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.

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.

 Worker classification is complicated and can be very costly when you get it wrong.  All too often employers try to go it alone and navigate the rules. The end often results in a sizeable payout and bad publicity.

Cintas Corporation blames the union citing the suit was merely its way of pressuring it to allow worker unionization. The union’s opinion “After six long years of delay tactics and needles posturing by Cintas, drivers will finally receive just compensation for overtime work,” said Workers United’s president, Bruce Raynor.