Worker Misclassification

Transcription

1 NASWA 2012 UI Director s National Conference Reno, Nevada Worker Misclassification An Update From Constitution Ave Tom Crowley UI Tax Chief, U.S. Department of Labor (202) Crowley.thomas@dol.gov (Presented Remotely from Washington, DC)

2 Agenda Define Employer Employee Relationship Safe Harbor Exceptions Worker Misclassification Definition and Motivating Factors State Collaborative Initiatives Ongoing & New Federal Initiatives Effective Audit Measure W/Preliminary Results USDOL Misclassification Partnering Initiative ETA Support Funding for Misclassification Detection

3 How Do Agencies & Employers Determine an Employee? IRS Common Law 20 Factor Test 3 Tests Behavioral Control, Financial Control, and Relationship of the Worker and the firm IRS Form SS-8 State UI ABC Test (next slide) A and/or B and/or C IRS rules Other USDOL W&H Economic Reality Test

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9 Internal Revenue Service (IRS) Section 530 (Safe Harbor) IRS must operate within the provisions of Section 530 When an employer erroneously classifies employees or a group of employees as independent contractors, the employer will be held harmless for past and future Federal employment tax obligations if he or she relied on: Past rulings or judicial precedent Industry practice Past IRS audit practice Any other reasonable basis Rule applies to IRS & FUTA, but NOT necessarily to SUTA. Similar businesses not necessarily required to be treated equally Prohibits the IRS from publishing regulations and Revenue Rulings with respect to the IC status of an individual for Federal employment taxes or income tax withholding

10 Safe Harbor (Continued) To be construed liberally in favor of taxpayers (employers) The employer must apply IC status to all similar workers The employer must not have treated the worker as an employee for any period Employer must file all Federal tax returns consistent with treating such worker as an IC (form 1099) Provisions do not apply to employers with unreported workers

11 Worker Misclassification What is It? Two common types of misclassification: Classify employee as independent contractor (on IRS form1099) Unreported worker (off the books) Consequences Employee excluded from UI system UI taxes underpaid Other employment taxes underpaid Employers not treated or competing equally Probably illegal Excludes workers from protection under FLSA & W&H Fosters illegal alien activity

12 Employer Incentives to Misclassify Competition Locally, Regionally, Nationally & Globally Level playing field among competing employers Limited regulatory oversight Regulatory and taxation reporting Costs above labor rates Employment taxes (FICA & UI) Withholding taxes (Federal/State/Local) Health Care Workers Compensation

13 Based on Employee Earning $15 / Hour, $31,200 Annually SUTA Wage Base =$10,000 SUTA Tax Rate =2.50% FUTA Wage Base =$7,000 Federal Withholding Rate =19.00% Self-Employment Rate = 15.30% FICA Rate =7.65% Workers Compensation (Construction) =12.30% Description Employer Costs Employee Costs Covered I/C Covered I/C Federal Income Tax Withholding $0.00 $0.00 $5, $0.00 Federal Estimated Tax Payments $0.00 $0.00 $0.00 $5, Federal Unemployment Tax $56.00 $0.00 $0.00 $0.00 State Unemployment Insurance $ $0.00 $0.00 $0.00 Workers Compensation (constr) $3, $0.00 $0.00 $3, Health Care Coverage $5, $0.00 $1, $6, FICA $2, $0.00 $2, $4, Total Employment Costs $11, $0.00 $9, $20, Net annual compensation for the worker $21, $10, /6/

14 Ongoing State Initiatives Task Forces Cross-Functional group that cooperatively works to prevent and deter misclassification Could include UI, Revenue, Workers Comp., Secretary of State, state W&H, Licensing MOU and/or agreements Data mining Share, share, share

15 Ongoing Federal Initiatives Questionable Employment Tax Practices (QETP) ETA - New Effective Audit Measure USDOL Misclassification Partnering Initiative ETA Funding opportunities SBRs, 2013 budget Request

16 QETP Collaboration among state UI & IRS 37 states signed MOU s with the IRS USDOL endorsed (UIPL 17-07) Combat employment schemes or tax practices which have no basis other than to evade state and/or federal employment or unemployment taxes Provides an agreement to allow information sharing between the state and IRS IRS will accept work papers from state UI to assess Federal employment taxes States are seeing significant results

17 QETP States - Reclassified more than $1.8 billion in wages and assessed over $27 million through the use of federal examination results, SS-8 determinations and 1099 extract information; IRS - Assessed almost $23 million in taxes from state referrals; Sharing research and examination techniques; IRS has worked with the Financial Crimes Enforcement Network (FINCEN) to provide states with the ability to access FINCEN data; and Joint outreach and education help employers voluntarily meet their employment tax responsibilities

18 QETP Results Source: IRS Reporting # of Reporting States # of State with Results QETP - States' Cumulative Results Report Total $ Assessed W/O P&I Avg. $ Assessed Per Exam Ave Wages Reclassified Per Exam Total Workers Reclassified Ave Wrkr Reclassified Per Exam Number of Businesses Examined Total Wages Quarter Reclassified Jun $6,137,419 $1, $465,944,281 $119, , ,884 Sep $6,806,629 $9, $305,245,091 $430, , Dec $1,427,324 $5, $96,224,375 $389, , Mar $527,853 $2, $22,510,560 $85, , Jun $820,109 $1, $83,687,835 $139, , Sep $1,470,511 $2, $103,089,448 $150, , Dec $3,683,172 $6, $244,271,715 $409, , Mar $550,881 $1, $47,853,165 $101, , Jun $1,169,167 $1, $77,026,496 $119, , Sep $1,034,904 $1, $86,082,071 $87, , Dec $1,925,952 $2, $110,708,516 $169, , Mar $1,193,608 $ $57,967,948 $36, , ,598 Jun $770,703 $1, $160,762,236 $276, , Total $27,518,232 $1,861,373,737 $156, , ,913

19 Effective Audit Measure Reporting Began on March 31, 2011 Significant provisions Reduces required percentage of contributory employer audits from 2% to 1%, annually Expands definition for misclassified workers detected by audit to include 1099 employees AND unreported (off the books) employees Four Audit Factors combine for Pass / Fail Penetration rate Percentage of total wages audited annually Percentage of wages changed by audit Average number of misclassifications detected by audit

20 Effective Audit Measure Results _taxinfo/2011/auditmeasure.pdf

21 Effective Audit Measure Results

22 Effective Audit Measure Results

23 Audit Data Source: ETA 581 Contributions Operations Report Year # Audits Number of Misclassified Average Number of Misclassifications Total Wages Discovered Average Amount of Wages Discovered per Average Amount of Wages per Worker % Audits Resulting in Change Workers Per Audit Audit Discovered , , $1,815,968,012 $16,015 $14, % , , $2,022,483,640 $17,011 $16, % , , $2,242,798,141 $18,175 $16, % , , $2,235,658,270 $18,691 $16, % , , $2,570,351,349 $22,099 $16, % , , $9,290,360,049 $79,076 $61, % , , $3,006,424,911 $27,660 $14, % , , $3,279,120,322 $30,321 $17, % , , $4,435,985,969 $41,540 $21, % , , $3,581,007,115 $37,291 $14, %

24 USDOL Misclassification Partnering Initiative 2009 GAO Report - Improved Coordination, Outreach, and Targeting Could better Ensure Detection and Prevention of Misclassification Partnering MOUs between USDOL, IRS, and state agencies USDOL agencies include Wage & Hour Division, Occupational Safety & Health Administration, Federal Contract Compliance Program, Employee Benefits Security Administration, and Employment & Training Administration States include CA, CT, HI, IL, MA, MD, MN, MO, MT, NY, WA, and UT Signing ceremony on 9/9/11 attended by Secretary Solis and IRS Commissioner Shulman Establishes framework to share wage and hour information

25 ETA Funding Opportunities for State UI Agencies SBRs for Misclassification Only 2 States submitted SBRs for 2012 $887,779 funded 2013 President s Budget Request $10 million in competitive and high performance will be available for states to increase their capacity for detecting misclassification and enforcing their state UI laws and policies. FYI - The previous three Presidents Budget Requests contained amounts for misclassification enforcement activities, but were not included in the final enacted budgets.

26 Questions?