IRS Launches Voluntary Worker Misclassification Forgiveness Program

As part of a new “Fresh Start” program initiated by the Internal Revenue Service employers who are currently, or have been misclassifying their workforce can now voluntarily come clean for a “minimal payment” that will cover their past payroll tax obligations.

The IRS seem to be slowly eliminating any excuse employers might make when misclassifying their workforce to avoid paying their appropriate tax obligations.

http://www.irs.gov/newsroom/article/0,,id=246203,00.html

Worker classifications – are you properly classifying your employees and independent contractors?

      

 

by Susan Gross Sholinsky, EpsteinBeckerGreen

In light of a number of aggressive tactics being pursued by the federal and many
state governments to challenge companies’ designations of workers as
“independent contractors” rather than “employees,” you should ensure that you are
making such designations properly. State governments have been using various
methods for enforcing proper classification of workers. For example, several states
(particularly New York, which has created a multi-regulatory agency joint task force)
have initiated both random and targeted audits of apparent worker misclassification.

Misclassification can be costly, so companies are urged to review their worker classifications at regular intervals.

We have seen unemployment insurance claims brought not only by contractors arguing that they
should have been classified as employees (and are, therefore, eligible for unemployment
insurance), but also by the State of New York on behalf of “all those similarly situated” to the
contractor.

In other words, New York employers may find themselves faced not with one
unemployment insurance proceeding based on an allegedly misclassified contractor, but two –
the second being brought by the New York State Department of Labor (“NYSDOL”) on behalf of
other workers who are allegedly “similarly situated” to the worker claiming he/she has been
misclassified.

Whichever way you may be targeted, you should be aware that both the federal and state
governments have been focusing on worker misclassification – many state governments have
established task forces to address the issue, as noted above with respect to New York State.

The federal government has also proposed several new laws and rules pertaining to this issue.
Governments generally have a dual purpose: (i) to “protect” workers, and (ii) to recoup
employment taxes and unemployment insurance premiums to increase government coffers.

So what should you do?

As you may be aware, several legal standards and tests are used by the courts and applicable administrative bodies to determine whether a worker is actually an
“employee” (and not a contractor). However, the level of control that a company has over the
worker regarding the means and manner of the work, rather than just an interest in the finished
product, will generally be the best predictor of whether he or she will be deemed an employee, if
challenged.

For example:

  • Is the worker required to work on the company’s premises?
  • Must the worker perform services during the company’s business hours?
  • Does the worker use the company’s equipment and have a company e-mail address, phone extension, or business card?
  • Can the term of the relationship be terminated immediately for poor performance or other reasons?

If the answers to the questions above are “yes,” then the worker may be deemed an employee,
if challenged.

On the other hand, if many of the answers to the questions below are “yes,” the
worker probably has been properly classified as a contractor:

  • Is the worker free to perform services for other companies during the term of the relationship with the company?
  • Does he/she use his/her own equipment (laptop, computer software, tools, etc.)?
  • Does the contractor work on his/her own schedule?
  • Is the work performed off the company’s premises?
  • Does he/she advertise his/her services to others (whether on the Internet, in the phone book, or otherwise)?

This document has been provided for informational purposes only and is not intended
and should not be construed to constitute legal advice. Please consult your attorneys in
connection with any fact-specific situation under federal law and the applicable state or
local laws that may impose additional obligations on you and your company. © 2011
Epstein Becker & Green, P.C.

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United States: Senate Bill Proposes To End Misclassification Of Independent Contractors

08 September 2011

Article by M. Christine Carty

The Senate Health, Education, Labor and Pension Committee is currently considering legislation introduced on April 8, 2011 intended to end misclassification of employees as independent contractors. Senate Bill 770 (S.770), known as the “Payroll Fraud Prevention Act” (“PFPA”), 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. On its face, the PFPA is straightforward legislation, but the implications of some of its provisions are far-reaching and its activist approach conflicts with existing protections for companies that include independent contractors within their workforces.

The direct effect of S. 770, if enacted, will be to (i) require all employers to provide written notice to all employees and “non-employees” (i.e. independent contractors) of their status1 and refer the recipients to the U.S. Department of Labor (“DOL”) website for information about their rights, (ii) impose penalties of up to $5,000 for each misclassification, (iii) increase audits of companies in targeted industries, and (iv) increase referrals of perceived violations to the Wage and Hour Division from other divisions within the DOL. The proposed language of the mandatory notice is very specific: “Your rights to wage, hour and other labor protections depend upon your proper classification as an employee or non-employee. If you have any questions or concerns about how you have been classified or suspect that you have been misclassified, contact the Department of Labor.” The PFPA also would require the DOL to set up a web page within six months that explains workers’ rights regarding classification. Finally, S. 770 establishes a private right of action for workers to enforce the provisions of the PFPA.

While these provisions are straightforward, other provisions of this legislation have less obvious and potentially more far-reaching effects. S. 770 directs that if an employer does not provide the required notice to a “covered individual” (i.e. independent contractor), there is a presumption that the individual is an employee, which can be rebutted only by “clear and convincing” evidence that the person is not an employee. This clear and convincing standard is much higher than the preponderance of the evidence standard (generally understood to be “more likely than not”) required to prove most civil suits. Further, if reclassified, a worker will be entitled to other FLSA protections, including a review of his or her wages for up to three years for compliance with minimum wage, hours and overtime requirements. If it is found that a company failed to comply with any of the minimum wage, hours or overtime requirements in compensating a reclassified worker during the three year period reviewed, the S. 770 prescribes that the employer must pay a “special penalty” in the amount of four times the actual unpaid minimum wages or overtime compensation. Of course, it is unusual for a company to pay overtime to an independent contractor, making the risk of exposure to a substantial penalty greater for entities that rely heavily on independent contractor relationships. Thus, potentially, a mistaken failure to provide an independent contractor with the statutory notice of rights could result in the worker’s reclassification as an employee by presumption followed by a significant financial penalty for each reclassified worker. The “special penalties” could easily become significant if the employer failed to give notice to a group of workers.

Read the rest of this mondaq.com article by M. Christine Carty of Shnader Attorneys at Law here >>