Heightened Scrutiny of Worker Classification Avoiding Liability and Penalties Amid Aggressive DOL and IRS Enforcement

Transcription

1 Presenting a live 90 minute webinar with interactive Q&A Employee or Independent Contractor? Heightened Scrutiny of Worker Classification Avoiding Liability and Penalties Amid Aggressive DOL and IRS Enforcement TUESDAY, NOVEMBER 16, pm Eastern 12pm Central 11am Mountain 10am Pacific Td Today s faculty features: Douglas Weiner, Senior Trial Counsel, Epstein Becker & Green, New York Dean L. Silverberg, Shareholder, Epstein Becker & Green, New York Michelle W. Johnson, Partner, Nelson Mullins Riley & Scarborough, Atlanta The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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4 Employee or Independent Contractor? Heightened Scrutiny of Worker Classification Part One Presented by Douglas Weiner November 16, 2010 NY:

5 TODAY S PRESENTATION WILL INCLUDE: My colleagues and I will give you a close look at the new investigative techniques government agencies are using to heighten h scrutiny of worker misclassification; An analysis of the possible risk and potential exposure for misclassification; and Assistance with assessing your current worker classifications; offering remedial direction and best practices for avoiding misclassification in the future. 5

6 HEIGHTENED SCRUTINY February 18, 2010 New York Times front page article. Obama administration cracking down on employee misclassification. Employers who merely issue 1099s are subject to audit, tax assessments, backwages and penalties, higher UI tax assessments, and periodic audits. Federal and State agencies are focused on independent contractor investigation and enforcement. 6

7 SIGNIFICANT NUMBERS 3.4 million: Federal study concluded that number of workers were misclassified as independent contractors 30 percent: Department of Labor estimates that up to that percentage of companies misclassify workers 7

8 Federal and State Task Forces Now Share Information Previously a single agency would audit an employer, with no referral to any other agency. State Workers Compensation State Department of Labor State Unemployment Insurance State Department of Taxation Federal Tax Federal Labor 8

9 2007 NEW YORK ANNOUNCES THE CREATION OF A JOINT ENFORCEMENT TASK FORCE TO Specifically remedy employee misclassification as independent contractors Facilitate sharing of information among tax and labor regulatory agencies Establish a public awareness campaign Establish a telephone hotline and to allow anonymous complaints from the public These Investigative and Enforcement Techniques are Now Standard Federal and State Task Force Procedures 9

10 State Enforcement Criminal Penalties Enhanced Civil il Fines and Penalties State and Federal Governments seek to close the tax gap with enhanced payroll tax collection Let me give you some examples 10

11 Current Active State Enforcement Agencies Independent Contractor Enforcement Programs 1. New York 9. Indiana 2. New Jersey 10. Iowa 3. Connecticut 11. Ohio 4. Illinois 12. Vermont 5. Maryland 13. Nevada 6. Michigan 14. Maine 7. California 15. Colorado 8. Massachusetts 16. Delaware 11

12 Current Active State Enforcement Agencies Active State Enforcement Programs Cont d 17. Kentucky 18. New Mexico 19. Oregon 20. Pennsylvania 21. Rhode Island 22. Texas 23. Washington 12

13 Enforcement Initiatives to Implement Wage and Hour Compliance US DOL Enforcement Targets: Enforcement budget is increased by $25 million 100+ more investigators and enforcement personnel are added to remedy employee misclassification as Independent Contractors. DOL Publicity Campaign - We Can Help : Worker and community outreach IRS National Research Project 6,000 audits over 3 years 13

14 WAGE & HOUR Overtime and Recordkeeping Review state and federal tests for independent contractor vs. employee DOL unconvinced by job titles and descriptions The Solicitor of Labor was former New York Commissioner of Labor Task Force approach implemented on Federal level Plan/Prevent/Protect : Employer must: Create, implement and monitor plan to identify and remedy violations Openness and Transparency to Achieve Compliance : Employers will have to: - Perform classification analysis of each exempt position - Implement new recordkeeping procedures - Share payroll records with employees 14

15 Wage Hour Compliance Required if Worker is Reclassified Recordkeeping Overtime Remote access, including BlackBerry time meal and rest periods state laws 15

16 STRENGTHENED WAGE & HOUR LAW: The Employee Misclassification Prevention Act Proposed new law with organized labor and White House support New recordkeeping requirements Must notify employees of status/rights as employee or independent contractor (IC) If fail to keep records or provide notice: Rebuttable presumption individual is employee Stiff penalties for violations DOL must target industries for audits State unemployment insurance agencies must conduct auditing programs 16

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19 New Initiatives As the Task Force operates in its third year, a number of new initiatives are currently being undertaken to build on the work of the JTF s first two years, including: (1) the establishment of an advisory council consisting of a steering committee and 5 regional advisory groups to guide the Task Force s efforts; (2) the commissioning of a research study to show the current depth and scope of employee misclassification and the underground economy in Massachusetts; (3) the implementation of fraud detection technology to assist targeted enforcement by member agencies; (4) the reorganization of the Task Force s Investigative Sub-Team to streamline the investigative process; (5) the building of an education and outreach plan to further inform workers, businesses, and municipal decision-makers about the work of the Task Force and the state s employer compliance standards; and (6) the development of a Task Force informational handout and a new Task Force web page, both components of the Task Force s education and outreach strategy. 19

20 Recent cases in private litigation Maintenance worker in Illinois proves employee status wins back wages for overtime Dancers at New York adult entertainment club gain conditional collective certification 20

21 THANK YOU! Douglas Weiner Senior Trial Counsel Phone: 212/ Fax: 212/ Park Avenue New York, New York DOUGLAS WEINER is in the Firm s Labor and Employment practice. He has 30 years of federal wage and hour litigation experience. Mr. Weiner: Provides compliance advice and counsel to employers to avoid litigation Defends class actions in federal and state courts Defends FLSA collective actions in arbitrations Defends government contract investigations involving prevailing wage requirements Negotiates settlements of law enforcement and class and collective actions As Senior Trial Attorney for the New York Regional Solicitor's Office of the U.S. Department of Labor, Mr. Weiner was the lead prosecutor for many of the Department s most significant wage and hour cases. 21

22 Employee or Independent d Contractor? Heightened Scrutiny of Worker Classification Presented by Dean L. Silverberg, Esq. Epstein Becker & Green, PC 250 Park Avenue New York, NY Tel: (212) Fax: (212) DSilverberg@ebglaw.com November 16, 2010

23 IMPACT ON YOUR BUSINESS: POTENTIAL AREAS OF LIABILITY AND EXPOSURE Specific Exposure (for example) 1. Unemployment Insurance Premiums 2. Workers Compensation/Disability Premiums 3. Wage and Hour (State and Federal) 23

24 THE STATE COMMON LAW STANDARD Traditional Common Law Rules Judge Made Laws Worker Classification Determinations Are Questions of Fact: Multi-Factor Analysis Consideration of All Aspects of the Relationship 24

25 PRINCIPAL INQUIRIES * Control Over Manner and Means Method of Payment Equipment, Materials and Supplies Right to Discharge/Terminate Hours of Work Relative Nature of the Work 25

26 FEDERAL STANDARDS 1. Economic Realties Test 2. Combination (or Hybrid ) Test 26

27 ECONOMIC REALITIES TEST Not what the IRS uses (More To Come Shortly) Right to Control Found To Be Overly Restrictive ERT: Focuses On How Economically Dependent The Worker Is On The Business Served 27

28 ECONOMIC REALITIES TEST: FACTORS Dependent/Independent Nature Portion of Income From Putative Employer Skill Level Integral Part of Business or Merely Adjunct Intent of Parties (helpful, but not dispositive) 28

29 THE COMBINATION TEST Hybrid Test Combines Economic Realties Test With the Right-to-Control Test And Common Law Principles of Agency Control Opportunity for Profit/Loss Investment Special Skills Required Degree of Permanence Integral Part of Business 29

30 UNEMPLOYMENT INSURANCE TAXES Quarterly Tax Premiums U.I. Formula Established By NYS (Experience Rating multiplied li by each employer s salary up to first $8,500 per annum) Caution: Carefully Review The U.I. Forms Received From the State 30

31 POTENTIAL U.I. AUDIT RESULTS (Examples N.Y.S.) 1. U.I. Premiums On Behalf of All Reclassified Workers Going Back Three years 2. In Past: Where Back Premiums Paid Promptly, Generally No Fines/Penalties But Interest At 12 % per annum Compounded 31

32 WORKERS COMPENSATION/DISABILITY PREMIUMS Big Ticket items Premiums Penalties 32

33 WAGE AND HOUR CONSIDERATIONS 1. State: Right to Control Federal: Eco. Realties/Hybrid 2. Minimum Wage 3. Spread of Hours 4. Overtime 5. Multi-Year SOL Beyond FLSA Coverage! 6. Potential for Fines and Criminal sanctions 30-33

34 TAX CONSIDERATIONS 34

35 NATIONAL INITIATIVES QETP: Questionable Employment Tax Practices: Employment tax schemes or practices that have no objective other than to avoid federal and/or state employment taxes. Tax Gap: The amount of tax revenue collected versus the amount that should be collected. Failure to collect appropriate income and employment taxes is cited as a major contributor to the tax gap 35

36 NATIONAL INITIATIVES November 2007 IRS announces QETP Initiative Collaborative, nationwide program among IRS, National Association of State Workforce Agencies, U.S. Department of labor, Federation of Tax Administrators and 29 state workforce agencies including New York and New Jersey. Allows participating agencies to exchange audit reports and participate in side-by-side examinations, when appropriate. Provides, for the first time, a centralized ed and uniform mechanism for IRS and state employment tax data exchanges. 36

37 NATIONAL INITIATIVES 2010 National Research Project Most comprehensive study of worker classification since ,000 employment audits during next three years. Primary focus- small businesses Pi Primary issues- worker classification, executive compensation and fringe benefits 37

38 TAX CLASSIFICATION Employee Versus Independent Contractor 20 Factor Test No one factor is determinative The main test is control 38

39 SAFE HARBOR Section 530 Safe Harbor Reasonable basis for classifying worker as independent contractor o may relieve employer from penalties. prior audit of workers in similar position long-standing industry practice of treating similarly situated workers as independent contractors IRS ruling or court decision employer must treat all similarly situated workers in a consistent manner employer must have filed 1099s 39

40 WHAT IS AT STAKE? Tax Liability Income tax, FICA (social security) and FUTA (federal unemployment) taxes that should have been withheld Civil Penalties 1. unintentional misclassification: 1.5% of wages paid and 20% of FICA tax. 2. Failure to report compensation of Form 1099: 3% of wages paid and 40% of FICA tax. Interest compounded daily at the short-term applicable federal rate. State taxes and penalties. 40

41 EMPLOYEE BENEFIT PLAN CONSIDERATIONS 41

42 IMPACT ON EMPLOYEE BENEFIT PLANS Affects maintenance and operation of all types of employee benefit plans Covering workers who are not employees places the tax-favored status of the plan at risk Excluding from participation i workers who are eligible employees can place the tax-favored status of the plan at risk, and give rise to claims for benefits 42

43 THE MICROSOFT CASE Vizcaino v. Microsoft, 9 th Circuit of Appeals, Microsoft hired independent contractors who signed agreements acknowledging that they would not be eligible for benefits under Microsoft s plans. 2. IRS in tax audit, determined that the independent contractors were misclassified and were common law employees. Court held that since the company s plans provided that any common law employee is eligible to participate in the plan, the misclassified workers were entitled to benefits under Microsoft ss plans. 43

44 SO WHAT DO YOU DO? Employers not precluded from including plan language to exclude certain groups of individuals id from participation Plan Fail-Safe Language Expressly define terms and exclude independent contractors t Contractors excluded from plan participation, even if subsequently reclassified as a commonlaw employee 44

45 SO WHAT DO YOU DO? Example of this type of language: If an individual not classified by the Company or a Participating Employer as an Employee is retroactively reclassified as such by any governmental or regulatory authority, such individual shall nonetheless be deemed to have become an Eligible Employee only prospectively on the event of such reclassification (and not retroactively to the date on which he was found to have first become an employee for any other purpose), and then only if he otherwise satisfied the requirements of this Section. 45

46 PROSPECTIVE EXCLUSION Employees may be categorically excluded But, need to ensure you will pass applicable Code coverage testing requirements BLUE 46

47 ACKNOWLEDGEMENT OF EXCLUSION/ WAIVER OF PARTICIPATION Microsoft court did not give much weight to executed waivers, but other courts have Waiver is not a substitute for clear, consistent plan/spd language State that the worker is ineligible to participate in plans Acknowledge that the exclusion applies retroactively, even if reclassified as a common-law o employee poyee Openly communicate waiver to worker; take no coercive action with respect to its execution RED 47

48 IF WORKERS HAVE BEEN MISCLASSIFIED UNDER RETIREMENT PLANS Rev Proc : IRS Employee Plans Compliance Resolution System ( EPCRS ) 1. Self Correction Program ( SCP ) 2. Voluntary Correction Program ( VCP ) 3. Audit Cap Correction on audit

49 PARTING WORDS Be Careful Out There!! 49

50 Employee or Independent Contractor? Heightened Scrutiny of Worker Classification BEST PRACTICES TO LIMIT LIABILITY Presentation for Strafford Publications by Michelle W. Johnson Nelson Mullins Riley & Scarborough LLP Atlantic Station th Street NW, Suite 1700 Atlanta, GA (404) November 16, 2010

51 Self-Audit Independent Contractor Practices to Ensure Proper Classification Nelson Mullins Riley & Scarborough LLP 51

52 Ten Questions to Help Determine Whether Contractors Are Properly Classified Have all independent contractors signed written independent contractor agreements? Are the contractor's duties integrated with core business operations, or does he or she perform non-essential business activities? Nelson Mullins Riley & Scarborough LLP 52

53 Ten Questions to Help Determine Whether Contractors Are Properly Classified Does the contractor provide full-time services to you, or does he or she work for other companies also? Does the contractor t receive employee benefits such as insurance coverage or paid time off? Nelson Mullins Riley & Scarborough LLP 53

54 Ten Questions to Help Determine Whether Contractors Are Properly Classified Must the contractor's services be performed on-site, or during specific hours? Must the contractor's t services be performed personally? Nelson Mullins Riley & Scarborough LLP 54

55 Ten Questions to Help Determine Whether Contractors Are Properly Classified Does the contractor do the same job as or work side by side with company employees? Does the contractor have a supervisor who directs his or her work, or does the contractor supervise company employees? Nelson Mullins Riley & Scarborough LLP 55

56 Ten Questions to Help Determine Whether Contractors Are Properly Classified Is there a non-compete agreement that would prevent the contractor from providing services to other employers? Is the contractor expected to attend company meetings or periodic or ongoing training i as to procedures and methods to be used? Nelson Mullins Riley & Scarborough LLP 56

57 Protect Your Company With a Well-Drafted Independent Contractor Agreement Nelson Mullins Riley & Scarborough LLP 57

58 Ten Essential Elements of an Independent Contractor Agreement Limit agreement to a specific term or project that t cannot automatically ti roll over. Provide that contractor shall determine how, when, and where the work will be done. Nelson Mullins Riley & Scarborough LLP 58

59 Sample Provision Method of Performing Services. Contractor will furnish all labor and equipment necessary to perform the work, and shall solely control the means, manner and method of performance; subject, however, to the terms and conditions of this agreement. The Company shall, however, be entitled to exercise general power of supervision and control over the work to assure satisfactory performance, including the right to inspect, the right to stop work, the right to make suggestions or recommendations, and the right to propose modifications. Nelson Mullins Riley & Scarborough LLP 59

60 Ten Essential Elements of an Independent Contractor Agreement State that contractor may provide the same or similar services to other companies while the agreement is in effect. Explicitly acknowledge that independent contractor t relationship exists, and that t contractor will pay his or her own taxes. Nelson Mullins Riley & Scarborough LLP 60

61 Sample Provision Relationship Between the Parties. The relationship between the parties shall be that of independent contractors under Georgia law, and not of employer-employee. In all public records, in its relationship with others, and in any documents, Contractor shall clearly indicate the independent ownership of Contractor's business and that operations of said business are separate and apart from the operations of the Company's business. Contractor will not be treated as an employee of the Company for purposes of state or federal antidiscrimination laws, the Fair Labor Standards Act, the Federal Income Contribution Act, the Social Security Act, the Federal Unemployment Tax Act, nor Income Tax Withholding. Nelson Mullins Riley & Scarborough LLP 61

62 Sample Provision Relationship Between the Parties (cont'd). Contractor is responsible for the payment of estimated income and selfemployment taxes. Contractor further agrees to indemnify and hold harmless the Company for any liability with the Internal Revenue Service or any state tax agency, as well as local laws and regulations regarding the payment of such taxes on income from self-employment l and wages paid its employees. Nelson Mullins Riley & Scarborough LLP 62

63 Ten Essential Elements of an Independent Contractor Agreement If possible, require that contractor provide own tools and equipment. Spell out that contractor is not covered by company's liability, health, or workers compensation insurance, and receives no other employee benefits. Nelson Mullins Riley & Scarborough LLP 63

64 Sample Provision No Benefits. Contractor shall not be entitled to participate in health or disability insurance, retirement benefits, or other welfare or pension benefits (if any) to which employees of the Company may be entitled. Nelson Mullins Riley & Scarborough LLP 64

65 Ten Essential Elements of an Independent Contractor Agreement Require that contractor be responsible for his or her own expenses. If appropriate, require that contractor add company as additional insured on contractor's liability insurance policies. Nelson Mullins Riley & Scarborough LLP 65

66 Sample Provision Insurance. Contractor agrees to purchase "occurrence" based commercial general liability insurance with a limit of liability of at least $1,000,000 per occurrence and a general aggregate limit of at least $2,000,000. The Company, its officers, directors, and employees shall be included as additional insureds. In addition, Contractor will maintain automobile liability insurance for all owned, non-owned, and hired vehicles with a limit of at least $1,000,000 combined single limit for bodily injury or property damage. The Company, its officers, directors, and employees shall be named as additional insureds on such a policy. Nelson Mullins Riley & Scarborough LLP 66

67 Ten Essential Elements of an Independent Contractor Agreement Pay for tasks accomplished rather than hours worked. Provide for indemnification by contractor for taxes owed, workers compensation claims, discrimination claims, tort liability. Nelson Mullins Riley & Scarborough LLP 67

68 Sample Provision Indemnification. The Contractor shall indemnify and hold harmless Company and its officers, directors, and employees, for any claims brought or liabilities imposed against the Company by Contractor or by any other party (including private parties, governmental bodies and courts) including claims related to Workers' Compensation, wage and hour laws, discrimination, employment taxes and benefits, and whether or not related to Contractor's status as an independent contractor. Indemnification shall include any and all losses, including costs and attorney fees. Nelson Mullins Riley & Scarborough LLP 68