Worker Classifications from a Third Party

Contacting a third party for a recommendation on your worker classification is not a foreign idea.  The IRS has an SS-8 form that a worker can complete to obtain their worker status for Purposes of Federal Employment Taxes and Income Tax Withholding. While the IRS provides aid in determining status, I’d find it difficult to believe that the form is being utilized to its potential.  Why? I can’t imagine that there are too many people willing to share additional tax information with Uncle Sam.

So where does that leave workers? It leads them to sites like USovertimelawyers.com and ehow.com.  While these are just two examples of websites that target the worker audience, both contain different approaches.  For example, USOvertimelawyers.com’s main focus is on overtime.  Their site makes the transition to independent contractor misclassification on the notion that if you’re an independent contractor, you’re not collecting overtime.  The potential reader begins to wonder if they’ve been improperly misclassified and before they can finish the paragraph; USOvertimelawers.com’s has conveniently placed their 800 number on their site with hope that it provides an opportunity for the worker and a potential payout for the law firm.  This is the most common tactic utilized by many third party agencies looking to make a buck.  ehow.com on the other hand presents their material in a different manner without being over the top. The ehow.com approach is as simple as their title “How to Sue Your Employer for Wrongful Misclassification”. In four easy steps, ehow.com advises the worker on how to initiate a lawsuit with steps that include contacting an employment law firm and gathering as much material (employee handbooks, training material, memo’s, etc.) that could potentially support a misclassification case. If you didn’t know of an employment lawyers, ehow.com conveniently offers sponsored links of which all happen to be law firms. Convenient, isn’t it?

Independent Contractor Misclassification Audience is Evolving

The audience for independent contractor misclassification is changing. In the past, a majority of the news coming from the government or third party outlets have been directed at companies who misclassify workers. The general tone of the news releases reminds me of my childhood years when the boogeyman was going to get me if I didn’t comply. Now it appears that this kind of scare tactic doesn’t work as most companies continue to go about their business without fear of penalty.  The switch of targeting independent contractors as the audience is intriguing since it seems that we’re inching towards a whistleblower society. If companies cannot police themselves in their day to day business, why not engage a worker to police their own status. After all, the worker has much to gain and the potential employer, much to lose.

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! 

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.

Beginning in November 2009 the IRS will launch its latest National Research Program (NRP). This NRP will be focused on conducting employment tax audits.

Of the 6,000 employers unknowingly entered into the IRS lottery 2,000 of them will be declared winners in 2009.  The grand prize?  Fines, penalties and plenty of bad publicity. These unlucky employers up until the moment they are officially notified have no idea they have been entered into this audit sweepstakes.  They were randomly selected by the IRS and with any luck will come out of the audit only slightly bruised. 

Basis for these audits?  The U.S. Treasury Department released a study on the U.S. “tax gap”; the difference between taxes owed and taxes not paid by tax cheats. Who are they? They are employers who underreport, underpay or simply never file. The Treasury estimates a tax gap of $345 billion and the IRS views the gap as justification for the audits.

What is your plan of action should your number be declared a winner?

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.