Worker Misclassification Issues

 This is not the first time that XE has come under fire for its worker misclassification issues. In 2007, the chairman of the House Committee on Oversight and Government Reform, Rep. Henry Waxman (D-CA) accused the private military company of engaging in an illegal tax scheme. Rep. Waxman indicated that Blackwater managed to avoid an estimated $31M in employment taxes.

Independent Contractors Performing Similar Services

Fast forward to today and where is XE? At the exact same place minus the name change. The Waxman interrogation of ’07 did nothing to change the company’s worker classification practices. How can a contractor who’s providing military services to a private military firm be classified as an independent contractor?  Did XE not think that the worker was performing services that were similar to other W2 employees? Did they overlook the fact that independent contractors were performing services that were integral to their core business? Regardless of XE’s thinking (or lack thereof) they knew that they were untouchable. After all, they were doing business with the U.S.  Government and there was a need for their services overseas. 

Heads will turn if this lawsuit goes to trial.  Any new legislation created for the purpose of curbing worker misclassification will never be taken seriously as long as there are parties who are exempt from playing by the rules.

IRS Summertime Tax Tip 2009-20 has the top ten things every business owner should know about hiring people as independent contractors versus hiring them as employeesThe warning came in the form of a “tax tip” from the IRS. Its target is the small business owner. ”Whether you hire people as independent contractors or as employees will impact how much taxes you pay and the amount of taxes you withhold from their paychecks. Additionally, it will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them”.

Before you run out and hire a contractor stop at the IRS web page and pick up your free “get out of hot water” card.  Stop by and download 10 tips for keeping you on the right track and the IRS at bay. Other must see items like the tax videos  and employer guides are available for the taking.

Last week Minneapolis based Michelle Drake, attorney for a troupe of strip club dancers, filed suit against a strip club in federal court.  Drake claims this s a clear case of worker misclassification and in violation of both state and federal wage and hour laws. Drawing similarities between the strippers and hair stylists citing the only difference between the two ”the stylist is considered an employee and gets a wage, whereas the dancer is forced to work only for tips and “pay for the pole. Drake is demanding the same protections for her clients automatically supplied to hourly employees. 

All workers deserve protections from opportunistic employers who take advantage of unsuspecting employees. This case is certainly interesting when applying the smell test and control factors to determine worker status. Several characteristics of an independent contractor are present and perhaps the culprit. Renting a pole or a chair, freedom to choose the costumes/uniform of the day or night and payment at the end of the job may have been enough for the employer to decide to pay as freelancers. Although similar cases have been filed and won by dancers in California, Alaska and Texas this industry continues to operate outside the laws.  Legacy industry standards are often difficult for some employers to abandon especially when the service offering is as lucrative as this. With no regulation or industry watchdogs worker violations can easily be overlooked or simply missed.

Employers must remember to exercise caution when classifying workers. Evidence of control of a worker regardless of execution can result in an unfavorable outcome. Although no evidence an employer ever exercises control, the mere fact the right to control exists can be enough to reclassify to employee status.

Today Obama signed into law the Fair Pay Act making it easier for all workers to win pay-discrimination lawsuits based on sex, race, religion, national origin, age or disability.   Those who will benefit from this new law can thank Lilly Ledbetter an Alabama worker who stood up to Goodyear Tire & Rubber Co. She sued the company after she discovered that for almost two decades she had been paid less than her male counterparts. She claimed the discrimination caused her salary to be 15 percent to 40 percent lower than what her male colleagues earned.

The new law has many employers very nervous and legal council who once raced against the clock learned time has run out.  Employers are bracing for an expected jump in the number of cases coming out of the wood work.  Unfair business practices that are decades old have come full circle and its time to pay up. The law allows for new claims to be filed each time a worker’s job is affected by an act of discrimination. The anticipated increase in legal and administrative costs for American companies will be astronomical!

“Bottom line if you don’t want to be sued don’t discriminate.”

The Obama Administration announced yesterday the government will spend about $900 million dollars over the next 2 years to rebuild America’s infrastructure. The housing bubble in America bursts, consumers have no money to spend, businesses decreased product production and the final result is a net loss of 2.4 million jobs in 2008.  The economic forecast calls for even more pain and suffering well into 2009. Obama’s new job suddenly just got a little bit bigger and his list of to do’s just grew a little bit longer. Although the weight and magnitude of the countries woes continues to grow,  word on the street is the President Elect may be distracted by bigger issues. Say it isn’t so! Are we to believe the American people will just have to take a back seat to the passage of a few labor related bills? Absolutely! After all Obama co-authored two of the bills, made campaign promises to the Unions and the great compliance prophets have predicted employer Armageddon is close at hand. 

 the Feds have threatened for years to put a halt to illegal employer payroll practices.

All kidding aside the Feds have threatened for years to put a halt to illegal employer payroll practices. However, the states continue to lead the Feds in auditing efforts and passage of laws to help catch tax cheats. For example the State of California sent out employment relationship questionnaires to workers who were paid as independent contractors to ensure the workers were not really misclassified employees. In the past industry experts have forecasted an IRS tsunami for tax cheats but at the end of the day it was little more than a rain shower. Unfortunately the end result of depicting the IRS as the boogeyman only to have it fizzel left many employers desensitized to a real threat.

Good news! Under the new administration you can count on a whole new ball game complete with new rules and harsher penalties for foul balls. A provision for a massive overhaul of the broken payroll tax system exists in Obama’s economic recovery plan. How soon can we expect to see these changes? Sorry but I seemed to have misplaced my glass ball and tarot cards. 

So what can you do right now to get ready? Dig into your independent contractor pool and ask questions. Find out who they are and ask why they classify as contractors. If headcount constraints comes up in any conversation look out! In an audit who will be named as the employer of all misclassified independent contractors? You! Take advantage of the extra time you’ve been given.  If you have contractors but no files to support the classifications start building them right now.

Rest assured a change is a coming!

Christmas came a little early this year for some. Today FedEx announced it will settle a California lawsuit with its home delivery drivers shelling out more than $26.8 million dollars.  This huge payout may come as a surprise to some after the IRS reversed it’s assessment of more 319 million against FedEx  in early October 2008. The payee’s however were not surprised in the least. Tony Estrada and Jeff Morgan were jubilant when they received word the 10 year legal battle had come to an end, ”We always knew that we were being treated like employees and that FedEx was getting away with murder and was laughing all the way to the bank on the backs of its drivers.”

FedEx says this settlement is no way an admission of guilt on its part.  “FedEx engaged in this legal battle because they firmly believed that the thousands of contractors who serve California and every other state in the nation are independent business owners, not employees. The resolution of this single-work-area case has no bearing on our relationship with our network of independent contractors in California or any other legal case,’ the company said.

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.