REPORT NAPAC S TOP STORIES. In Other News CONTRACTOR CORNER ON NAPAC S RADAR

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1 REPORT NAPAC S TOP STORIES IRS v. Contractors: Government s 1099 Ramped-Up Audit Program Now in Progress, Obama Seeking $7 Billion in Taxes and Fines The Internal Revenue Service has confirmed that beginning in February 2010, it began the process to randomly audit 6,000 businesses over the next three years to focus on (1) payroll taxes, (2) fringe benefits, (3) independent contractor classification, (4) expense reimbursements, and (5) other related payroll issues. (Full story on page 2) EPA Delays Enforcement Actions for Failure to Be Certified, Does Not Delay Lead-Safe Work Practices Requirement On June 18, 2010, the EPA issued an internal guidance memorandum to its Enforcement Division Directors. This memorandum informed the EPA regional offices that (1) contractors that have failed to register as Renovation Firms with the EPA had until October 1 before they are at risk of being fined for that violation and (2) individuals who have failed to obtain licensure as Certified Renovators with the EPA had until September 30 to sign up for the training, which training must then be completed by December 31. (Full story on page 3) FedEx Ground Pays Over $3 Million to Massachusetts in 1099 Worker Audit The Massachusetts Attorney General s Office has entered into a multi-million dollar agreement with FedEx Ground to settle claims that the company misclassified its drivers as independent contractors. In the settlement, FedEx Ground agreed to pay more than $3 million back to the Commonwealth s general fund. The Attorney General s Office alleged that FedEx Ground s failure to properly classify drivers led the Company to make lesser payments to the Commonwealth for payroll taxes, worker s compensation, and unemployment assistance. (Full story on page 4) Federal Employee Misclassification Prevention Act Gains Ground in Congress On April 22, 2010, both the House and the Senate introduced companion bills known as The Employee Misclassification Prevention Act (EMPA). The legislation would target abuses of the employee/independent contractor classifications. The stated goals of the legislation are to both raise revenue and ensure that true employees have access to safeguards like fair labor standards, health and safety protections, and unemployment and worker s compensation benefits. (Full story on page 5) INDUSTRY ALERT: New Lead Test Kit Available (Full story on page 2) Contractor Sues Better Business Bureau Over Rating (Full story on page 3) Pennsylvania Attorney General Sues More Contractors (Full story on page 4) Illinois (Fortunately) Amends Its Home Repair and Remodeling Act (Full story on page 5) CONTRACTOR CORNER If my state has an EPA-approved Renovation, Repair and Painting Rule, do I need to follow both the EPA and my state s Rule? No. If your state has its own Rule, you must follow the state Rule only. To date, Iowa, Kansas, Massachusetts, Mississippi, North Carolina, Oregon, Rhode Island, Utah, and Wisconsin, have adopted their own Renovation, Repair and Painting Rules. Want to submit a question for the next Contractor Corner? your question to ccquestion@napac.net ON NAPAC S RADAR We re tracking this story to keep you updated on news that may affect our industry. EPA Proposes More Lead Paint Testing and Licensing For certain types of jobs (most importantly, window jobs), the EPA is proposing to require the renovation firm to demonstrate, through dust wipe testing, that dust-lead levels remaining in the work area are below regulatory levels. If adopted, this new obligation would only impose greater burdens on the industry. Stay tuned to NAPAC for more information. The National Association of Professionally Accredited Contractors is pleased to offer you this complimentary copy of the NAPAC Report. Future newsletters will be automatically ed to NAPAC members as a benefit of their membership (annual membership fee of $499). NAPAC also offers a subscription to the NAPAC REPORT for an annual fee of $149. To purchase a membership or subscription, visit NAPAC Have feedback about The NAPAC REPORT or napac.net? feedback@napac.net Copying, distributing, reproducing, or disseminating the NAPAC Report or any content herein without permission is a violation of U.S. and international copyright laws. For reprint and quote permission, please contact feedback@napac.net.

2 INDUSTRY ALERT: NEW LEAD TEST KIT AVAILABLE You may recall that prior to August 31, 2010, only two test kits were approved by the EPA. The first test kit was sponsored by the Commonwealth of Massachusetts and only available to Massachusettscertified lead inspectors and risk assessors. The second test kit was the Professional LeadCheck lead test kit manufactured by Hybrivet Systems. With the recent approval of the D-Lead Paint Test Kit manufactured by ESCA Tech, Inc., there are now three test kits available. The D-Lead Paint Test Kit is important because this test can reliably determine if regulated lead-based paint is not present on drywall, plaster, wood, and ferrous metal surfaces. Many contractors will know that testing drywall and plaster to date has been impossible using existing EPA-approved test kits. The D-Lead Paint Test Kit is in production, and ESCA Tech, Inc., has informed NAPAC they will begin shipping in September, starting with delivery of their 6-test kit retail package to Home Depot. By the end of October they hope to have up to 1.5 million test kits on the market, with a 24-test kit professional package being shipped through distributors. Estimated pricing on the retail package is $28.97, with the professional package set at $ However, NAPAC has been advised to expect distributor discounts of up to 40% on the professional package. To locate a distributor or retailer, visit Page 2 IRS v. Contractors: Government s 1099 Ramped-Up Audit Program Now in Progress, Obama Seeking $7 Billion in Taxes and Fines The Internal Revenue Service has confirmed that beginning in February 2010, it began the process to randomly audit 6,000 businesses over the next three years to focus on (1) payroll taxes, (2) fringe benefits, (3) independent contractor classification, (4) expense reimbursements, and (5) other related payroll issues. The audits are part of what the IRS is calling the Employment Tax National Research Project (NTP). The NTP s stated purposes are to (1) secure statistically valid information for computing the employment tax gap and (2) determine compliance characteristics so the IRS can focus on the most noncompliant employment tax areas. given the prevalence of independent contractors in the home improvement and remodeling industry, NAPAC has little doubt that our industry will be a common target. Unfortunately, because the audits are not only intended to raise revenue, but also to allow the IRS to gauge more accurately the extent to which businesses properly comply with employment tax law and related reporting requirements, the audits will be very comprehensive in scope, imposing significant burdens on the taxpayer. The 6,000 audits will target all types of businesses in all regions of the country, but given the prevalence of independent contractors in the home improvement and remodeling industry, NAPAC has little doubt that our industry will be a common target. Vice President Biden s Middle Class Task Force has directed the White House s campaign against worker misclassification, stating The last thing you want is to give a competitive advantage to employers who are breaking the rules. Organized labor, a powerful supporter of the President s campaign, has long targeted the use of 1099 workers in the construction industry as an unfair practice. No White House administration has ever undertaken as big a crackdown as is currently underway, although officials deny they are doing it as a favor to labor. On February 1, 2010, the federal budget was released, targeting a recovery of $7 billion in reclassification fines, taxes, and penalties. What can you do? You should review your independent contractor relationships, making sure that you have written agreements with all independent contractors and that you have adopted and are complying with legally defensible independent contractor protocols. Remember, once you receive an audit notice, it is too late to take corrective actions.

3 EPA Delays Enforcement Actions for Failure to Be Certified, Does Not Delay Lead-Safe Work Practices Requirement On June 18, 2010, the EPA issued an internal guidance memorandum to its Enforcement Division Directors. This memorandum informed the EPA regional offices that (1) contractors that have failed to register as Renovation Firms with the EPA had until October 1 before they are at risk of being fined for that violation and (2) individuals who have failed to obtain licensure as Certified Renovators with the EPA had until September 30 to sign up for the training, which training must then be completed by December 31. This memorandum was issued as the result of increasing political pressure and bad publicity over the means and manner in which the Renovation, Repair and Painting Rule was being implemented. What few seem to have understood is that this memorandum only addresses the EPA s intentions in assessing fines for these licensing issues. Indeed, the memorandum continues on to state that the EPA will otherwise continue to enforce the work practice requirements in the rule. In other words, the EPA is still going to enforce the requirements to test for lead-based paint and perform lead-safe work practices. Of course, at the state level, Contractors should also note that this delay in fines is inapplicable in regard to those states that have now implemented their own form of the Renovation, Repair and Painting Rule, such as Iowa, Kansas, Massachusetts. Mississippi, North Carolina, Oregon, Rhode Island, Utah, and Wisconsin. Finally, and perhaps most concerning, is the fact that while the EPA may be willing to forego imposing fines on unlicensed contractors, that does not change the law, which still requires a contractor to have such licensure and perform lead-safe work practices on a home as required. That the EPA is not going to fine a contractor has nothing at all to do with the fact that the contractor is still bound by the law, and can be sued by the consumer for violating that law under many state consumer protection statutes and legal theories. What few seem to have understood is that this memorandum only addresses the EPA s intentions in assessing Accordingly, NAPAC strongly suggests fines for these licensing issues. contractors continue on with their established lead paint protocols. Any contractor not yet properly licensed as a Renovation Firm or failing to use installers licensed as Certified Renovators should move to remedy that as Indeed, the memorandum continues on to state that the EPA will otherwise continue to enforce the work practice requirements in the rule soon as possible. CONTRACTOR SUES BETTER BUSINESS BUREAU OVER RATING Missouri-based Castle Rock Remodeling has filed a $500,000 lawsuit against the St. Louis Better Business Bureau alleging that the BBB (1) manipulated its own grading system by accepting illegitimate complaints that it knew did not meet its criteria, (2) allowed complaints to remain on Castle Rock s public record for more than 36 months, (3) allowed customers to refile a complaint after the 36-month period ended, and (4) arbitrarily set advertising standards and selectively applied those standards to Castle Rock. There appears to be bad blood between Castle Rock and the BBB, so it is likely that there is more to the story. However, this is not the first time contractors have complained about arbitrary ratings, and the BBB has been criticized for taking money from some of its larger member sponsors and Board members. NAPAC members should be aware that with the BBB recently abandoning its satisfactory or unsatisfactory grading scale in favor of a subjective school-style grading spectrum ranging from A-plus to F, it is imperative that members track their BBB file and ensure that it is as accurate as possible. Page 3

4 PENNSYLVANIA ATTORNEY GENERAL SUES MORE CONTRACTORS Pennsylvania s Attorney General has recently announced lawsuits against a number of home improvement contractors across Pennsylvania. The allegations include: not registering as a home improvement contractor, failing to register a fictitious business name with the Pennsylvania Department of State, using contracts that do not comply with the Pennsylvania Home Improvement Consumer Protection Act, failing to provide the customer with the required Notice of Cancellation, not obtaining necessary licenses and permits from municipalities, collecting excessive down payments, failing to start work, performing work in a shoddy or unworkmanlike manner, and not honoring warranties. The lawsuits seek restitution for all consumers who have allegedly been harmed, along with fines and civil penalties of up to $1,000 per violation or up to $3,000 for each violation involving a senior citizen. Pennsylvania has always been relatively aggressive with consumer protection, but with the recent enactment of the Pennsylvania Home Improvement Consumer Protection Act, and the current state of the economy, enforcement actions have increased. Care should be taken to ensure that your customer contracts are compliant with the Pennsylvania Home Improvement Consumer Protection Act. Visit NAPAC s state compliance area for more information. Page 4 FedEx Ground Pays Over $3 Million to Massachusetts in 1099 Worker Audit The Massachusetts Attorney General s Office has entered into a multi-million dollar agreement with FedEx Ground to settle claims that the company misclassified its drivers as independent contractors. In the settlement, FedEx Ground agreed to pay more than $3 million back to the Commonwealth s general fund. The Attorney General s Office alleged that FedEx Ground s failure to properly classify drivers led the company to make lesser payments to the Commonwealth for payroll taxes, worker s compensation, and unemployment assistance. In 2007 the Attorney General s Office cited FedEx Ground for violation of the Massachusetts Independent Contractor Law by misclassifying its drivers, failing to provide a proper paystub, failing to provide workers compensation, not paying overtime to certain drivers, and neglecting to deduct and withhold state income taxes. FedEx Ground appealed the matter to the Division of Administrative Law Appeals (DALA). The Attorney General s Office citations against FedEx Ground included penalties of more than $190,000. the Massachusetts Independent Contractor Law is currently one of the most burdensome in the nation. While FedEx Ground s appeal was pending before DALA, the Attorney General s Office coordinated further investigation with the Executive Office of Labor and Workforce Development and the Department of Revenue into FedEx Ground s business practices. The joint investigation revealed that FedEx Ground s misclassification of employees resulted in significant underpayments to the Department of Revenue, Division of Industrial Accidents, and Department of Unemployment Assistance. The settlement amount includes payments to these agencies and also provides for a payment for the 13 drivers named in the Attorney General s citation. FedEx Ground drivers in Massachusetts have brought their own lawsuit against FedEx Ground that remains pending and is not affected by this settlement. NAPAC members with operations in Massachusetts should remember that the Massachusetts Independent Contractor Law is currently one of the most burdensome in the nation. It provides that an individual performing any service shall be considered an employee unless (1) the individual is free from control and direction in connection with the performance of the service, both under his or her contract for the performance of service and in fact, (2) the service is performed outside the usual course of the business of the employer (an almost impossible standard), and (3) the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.

5 Federal Employee Misclassification Prevention Act Gains Ground in Congress On April 22, 2010, both the House and the Senate introduced companion bills known as The Employee Misclassification Prevention Act (EMPA). The legislation would target abuses of the employee/independent contractor classifications. The stated goals [This] legislation would target abuses of the employee/ independent contractor classifications. of the legislation are to both raise revenue and ensure that true employees have access to safeguards like fair labor standards, health and safety protections, and unemployment and worker s compensation benefits. EMPA would reduce the number of misclassification violations by: Ensuring that employers keep records that reflect the accurate status of each worker as an employee or non-employee and clarifying that employers violate the Fair Labor Standards Act when they misclassify workers. Increasing penalties on employers that misclassify their employees and are found to have violated employees overtime or minimum wage rights. Requiring employers to notify workers of their classification as an employee or nonemployee. Creating an employee rights website to inform workers about their federal and state wage and hour rights. Providing protections to workers who are discriminated against because they have sought to be accurately classified. Mandating that states conduct audits to identify employers that misclassify workers and by requiring that the U.S. Department of Labor (DOL) monitor states efforts to identify misclassification. Directing states to strengthen their own penalties for worker misclassification. Permitting DOL and IRS to refer incidents of misclassification to one another. Directing DOL to perform targeted audits focusing on employers in industries that frequently misclassify employees. NAPAC is providing comments to Congress on this proposed law and will continue to lobby on behalf of the industry. Please continue to visit for updates on this topic. ILLINOIS (FORTUNATELY) AMENDS ITS HOME REPAIR AND REMODELING ACT Illinois recently amended its Home Repair and Remodeling Act to make it clear that any person who suffers damages resulting from a violation of the Act may take legal action against the contractor under the state s Consumer Fraud and Deceptive Business Practices Act. The Home Repair and Remodeling Act applies to home repairs and remodeling projects that cost more than $1,000. Previously, courts had difficulty interpreting the Act s language. While this may sound like another attack on the home improvement and remodeling industry, this amendment is likely good news. Under the previous version of the Act, due to its vague language, if a court found a violation, the contract was often voided and the contractor prohibited from collecting any money for the job. Obviously, for what may have been an insignificant or an unintentional violation, this is an extremely harsh remedy. Going forward, if a contractor violates the Act, the customer has a private right to sue the contractor, but the contractor can still attempt to collect payment for the job. NAPAC members operating in Illinois should become well versed on this topic, as it is likely that your customers will still attempt to convince you that a mere technical violation of the Act voids your contract. Understanding the revised law allows you to challenge this erroneous position. Page 5