Title Goes Here. Independent Contractor Misclassification: Initiatives, Trends, and Key Preventative Measures. April 10, 2012

Transcription

1 Independent Contractor Misclassification: Initiatives, Trends, and Key Preventative Measures Title Goes Here Presented By: Kevin P. Hishta, Esq. Maggie Hanrahan, Esq. Ogletree, Deakins, Nash, Smoak & Stewart, P.C. (404) April 10, 2012

2 In the Obama Era Labor Secretary Hilda Solis - We re standing united to end the practice of misclassifying employees. We are taking important steps toward making sure that the American dream is still available for all employees and responsible employers alike. IRS Commissioner Doug Shulman This agreement takes the partnership between the IRS and Department of Labor to a new level. Acting Wage and Hour Administrator Nancy Leppink We re seeing more and more employers trying to avoid the cost of employing workers some employers discharge their employees and then bring them back as contractors or freelancers.

3 Independent Contractor Misclassification Initiatives Federal Enforcement Initiatives State Enforcement Initiatives Legislative Initiatives Litigation Trends Key Preventative Measures

4 Federal Enforcement Initiatives Budget for Fiscal Year 2013 allocates 14 million to independent contractor misclassification 10 million for grants to states to identify misclassification 3.8 million for enforcement by Wage and Hour Division of Department of Labor Budget for Fiscal Year 2012 also allocated 12 million to independent contractor misclassification Enforcement Trends Misclassification widespread Tactic to lower labor costs-wages, taxes and benefits Presumption against IC status

5 Federal Enforcement Initiatives Five-Year Misclassification Initiative (2010) Interesting components of Misclassification Initiative include: Commitment by DOL to work with Department of Treasury to conduct targeted investigations in industries with most flagrant abuse Training for investigators to detect misclassification Financial incentives for states with most success in targeting misclassification

6 Federal Enforcement Initiatives Results of initiative so far? 13 new wage/hour enforcement offices 6 expanded offices Numerous companies being audited in the following industries: Transportation Insurance Construction and janitorial Real estate Home health care Car wash/other labor positions

7 Inter-Agency Initiatives IRS and DOL have Memorandum of Understanding ( MOU ) 13 States have agreed to share information with DOL CA, CO, CT, HI, IL, LA, MD, MA, MN, MO, MT, UT, WA To date, Georgia has no such MOU

8 IRS Initiatives- Voluntary Compliance Settlement Program

9 Benefits of VCSP Allows companies to pay 10% of reduced tax rates under Section 3509 for most recent tax year alone No penalties or interest No audit for prior years

10 Risks of VCSP Must apply for participation- discretionary acceptance No guarantee of confidentiality as to workers themselves Agree to extend SOL from 3 to 6 years for all employment tax compliance issues company-wide Uncertainty

11 Risks of VCSP Agreement to comply for all future tax periods- potential for willful finding if future change in business model Change to employee status confers other substantive and procedural rights and may trigger jurisdiction for other federal statutes Potential impact of closing agreement- ambiguity construed against taxpayer

12 State Enforcement Initiatives Stop Work Orders CT attorney general issued 23 stop work orders in 2011 Attorney General investigations MA- $3 million settlement with FedEx Ground Mandatory change in business model Joint Task Forces NY JTF recovered over 12.5 million dollars CA JTF recovered 17.9 million dollars Georgia Enforcement efforts

13 Federal Legislative Initiatives Employee Misclassification Prevention Act of 2011 Rep. Lynn Woolsey (D-Calif.) Make misclassification an independent violation of FLSA Violation of FLSA overtime or minimum wage requirements attributable to misclassification = treble damages Impose recordkeeping requirements on firms using ICs Anti-Retaliation provision Payroll Fraud Prevention Act of 2011 Scaled down version of Employee Misclassification Prevention Act Recordkeeping obligations for ICs Notice of IC status and right to contest Failure to keep records or provide notice establishes presumption individual is employee under FLSA

14 Federal Legislative Initiatives Rebuild America Act of 2012 Independent Contractor provision buried in bill Increase minimum wage and other middle class protections Fair Playing Field Act of 2012 Jim McDermott (D-Wash.) and Sen. John Kerry (D.Mass) Eliminate continued use of Section 530 Safe Harbor going forward Require the Secretary of Treasury to issue guidance, to clarify which employee qualifies as independent contractors Require companies to provide a written statement to independent contractors informing them of rights

15 State Legislative Initiatives CA- advice liability NJ- union right to sue Initiatives are moving South - NC and VA

16 Litigation Trends FLSA collective actions State wage payment claims State fraud/misrepresentation claims ERISA/benefit claims

17 Principal Potential Liabilities Back taxes, interest and penalties (federal and state income, Social Security, and unemployment taxes) Overtime pay and liquidated damages Back pay Workers compensation costs Health and retirement benefits Tort liability Attorneys fees

18 Key Preventative Measures to Maintain Independent Contractor Status 1. Carefully drafted independent contractor agreement; 2. Separate policies/procedures; 3. Review benefit plans; 4. Management training; 5. Periodic audits; and 6. Avenue to raise business concerns.

19 1. Carefully Drafted Independent Contractor Agreement Avoid Company control terminology Industry standard compliance only Contractor controls manner and means Non-exclusivity and non-personal services provisions Make Contractor responsible for tools of the trade and benefits IC compliance with all legal obligations

20 1. Carefully Drafted Independent Contractor Agreement (cont.) Intent of relationship is independent contractor Payment by project or task Waiver of benefits (explicit) Avoid at-will termination Insurance

21 2. Maintain Separate Policies and Procedures Different terms and conditions from employees (including separate internal management procedures/guidelines) Different terminology/jargon and, most importantly BE CONSISTENT! Payment and ledger records Advertisements and public disclosure Rule of thumb: assume jury/judge will see all internal documents

22 3. Review Benefit Plans Ensure benefit plans clearly define who is (and who is not) a plan participant Explicit exclusion of independent contractors - - whether or not they are later deemed to be company employees Ensure terms of benefit plans are consistent with only employees receiving benefits

23 4. Management Training Knowledge of the contract Emphasize new type of relationship differences in how to treat independent contractors vs. employees Use correct terminology Independent contractor, not employee Advise, not supervise Breach of contract, not discipline Retain or engage, not hire or employ Terminate contract, not fire/discharge Careful preparation of documents, including , utilizing correct terminology Develop sample breach scenarios

24 5. Periodic Audits You have a carefully drafted agreement, you have trained your management, you have reviewed your benefit plans,... BUT what is really going on out there?

25 5. Periodic Audits (cont.) Assess use of privilege Review of independent contractor agreements Review of policies and procedures manuals Review of contractor recruitment materials Review of any training materials

26 5. Periodic Audits (cont.) Review of principal forms/communications used with contractors Review of IRS/state audit history Review of any prior model assessments Assessment of any significant litigation Review of Company benefit plans to ensure appropriate exclusionary language re: ICs Interview selected ICs

27 6. Avenue to Raise Business Concerns Credible Complaint Mechanism Arbitration/Mediation

28 Common Practical Issues The individual wanted to be paid on a 1099 = not a defense Having individuals treated as employees performing same jobs as independent contractors (i.e. Consulting Agreements ) Prior treatment as employee with no substantial or material changes to the relationship Strategies for reclassification Use of third party to minimize risks

29 Questions?