Chief of Tax Field Audit Manager Two Field Audit Supervisors Seventeen Field Auditor II Six Field Auditor I (new employees)

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2 69,000 liable contributory employers 660 reimbursable employers Over 70% of liable employers have less than ten workers $420 million trust fund balance as of June 2012 UI Tax staff: Chief of Tax Field Audit Manager Two Field Audit Supervisors Seventeen Field Auditor II Six Field Auditor I (new employees)

3 Each Auditor II is required to complete a total of five 1099/request audits and ten verification audits each quarter Utah has been doing 1099 audits for at least eight years Less resources require us to focus on trouble spots to maintain or obtain goals and meet the new UI Tax Effective Audit Measure requirements

4 The Utah Pay For Performance (P4P) was created by 2011 legislative action (Senate Bill 120) that requires staff to voluntarily change their employment classification (but still retaining merit rights) to participate in the program. The underlying objective of the program is to reward higher performing employees through systematic bonuses, remain cost neutral, and to increase the quality and quantity of the work processed. Currently in a pilot phase and has been tweaked multiple times (largely to get the incentive amounts right). The results are very encouraging. The performance outcomes are higher, no additional monies were required, and higher performing staff are appropriately compensated for working harder. Field auditors are paid $400 (will be increased to $600 in October) for each request/1099 audit completed above their standard five and $75 for each verification audit completed above their standard ten. Minimum bonus for a quarter has been $625. Maximum bonus has been $3,225. The maximum a person can receive in a year is $8000

5 Easiest way to increase Effective Audit Measure score is to increase the number of misclassified workers or unreported wages.

6 For the past eight years, the Dept of Workforce Services (DWS) has an MOU with IRS that allows for the sharing of 1099 data. DWS receives an annual Form 1099 data file for Non- Employee Compensation from the IRS listing individuals with a Utah address DWS uses the data from this file to conduct audits on those employers that have a high likelihood of incorrectly reporting independent contractor wages on a 1099 rather than as an employee on a W2 From the 1099 data, we exclude reimbursable employers, real estate and insurance companies, employers who have had an audit in the past three years Recipients who have more than one form 1099 also have higher likelihood of being independently established and not misclassified

7 Random/Request Audits Completed 5233 random audits (85% total audits) Covered $1.4 billion in total reported wages Identified $42 million in unreported wages to 6949 misclassified workers Variance of 2.9% (.029) 1099 Targeted Audits Completed 913 targeted audits (15% total audits) Covered $970 million in total reported wages Identified $138 million in unreported wages to 18,114 misclassified workers Variance of 14% (.14)

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10 In February 2011, Utah Legislation established a Council consisting of representatives from: The Labor Commission (Chair) The Department of Commerce The Department of Workforce Services (UI) The State Tax Commission The Attorney General Office (Advisory & Cooperative capacity) Workers Compensation Fund (participates in meetings; however no formal info sharing exists between all parties on the council)

11 Written MOUs for info sharing Informal, as needed, info sharing * An attorney/client relationship exists. between state agencies and the Attorney. General s Office Note: Re-disclosure of info is generally restricted and maybe prohibited by law.

12 Discuss various ways employees are misclassified and methods to estimate the extent of misclassification in Utah Share information, trends and results of audits Coordinate regulatory and law enforcement efforts related to employee misclassification Members of the public, including employers, are invited to attend the open meetings. (meetings are closed when specific investigative proceedings are discussed) Representatives from the IRS, US Dept of Labor and Homeland Security have been invited to make presentations regarding the federal government s efforts to address the misclassification of workers and the issue of restrictions on sharing information between federal and state agencies Identify companies that misclassify workers either as independent contractors or other schemes to circumvent employment status

13 Approximately eight years ago a new Labor Broker business model began to form in the construction trades Traditionally the workers had been treated as employees or independent sub-contractors. The workers are now working as members (owners) of the LLC and are thus exempt from coverage for all employment purposes. Utah became aware of ten entities operating under this business model, having in excess of 2000 workers LLC workers earnings are not subject to UI taxes, workers compensation coverage, contractors licenses, tax withholding, immigration verification, occupational safety laws, wage and hour requirements and other employee protections.

14 Traditional employers are required to pay the costs associated with employment and are not able to competitively bid on construction contracts. This model created a safe haven for potential illegal immigrant workers because they are not required to have their work authorization questioned Members/workers may be exploited; the workers must become members as a condition of work and may not know the true costs of being an LLC members, nor do any employee labor laws protect them Model could potentially spread to other industries

15 Utah Legislature was concerned that simply holding LLC members to be covered employment would have unintended negative consequences on legitimate LLCs. Senate Bill 35 was passed in the 2011 Utah Legislative General Session. The legislation amended the Construction Licensure statutes as follows: Defined Unincorporated Entity as any entity that is not an individual, corporation, or publicly traded company. Any unincorporated entity required to be licensed under the Utah Construction Trade licensing Act may have their construction license denied if any individual who holds an ownership interest engages in unlawful or unprofessional conduct. Unlawful or Unprofessional Conduct includes not being lawfully present in the United States, failing to provide workers compensation coverage, and unemployment compensation coverage to an individual who owns less than eight percent interest in the unincorporated entity. The unincorporated entities must provide the name, social security number and address of all individuals with an ownership interest and may require each to demonstrate financial responsibility.

16 Ten LLC construction companies were identified as engaged in a worker/owner model (member of Limited Liability Company) having in excess of 2000 workers All ten entities no longer have valid construction licenses either because they decided to no longer operate or renew their licenses or as a result of failing to comply with Senate Bill 35 requirements A new business entity using this business model formed during The Dept of Commerce is currently in contested administrative litigation with this company. There are 132 workerowner names with judgments of almost $1.5 million Numerous audits have resulted in employers becoming compliant and filing necessary reports and taxes DWS has identified over 1,300 workers that have been referred to Commerce, Utah Tax Commission and the IRS, who were determined to be employees, not independent contractors

17 For more information on the Council: Select Employee Misclassification under Services drop down or search for Misclassified Workers

18 An MOU was executed between DWS and DOPL in 2010 to share information in the area of construction trades. Construction trade licenses may be revoked or suspended if an employer is delinquent in filing UI quarterly reports or paying UI contributions. UI was able to collect over $306,000 in past due contributions on 72 Utah contractors in CY 2011

19 DWS, the Labor Commission and the Real Estate Division coordinate outreach efforts regarding their general position on the employment status of mortgage loan originators. Information on unemployment insurance laws, specifically as it relates to independent contractors, is provided in the Real Estate Divisions quarterly newsletter to licensed mortgage entities and individuals

20 One of Utah s top priorities is to educate employers on UI reporting requirements, including the correct classification of workers Participate in New Employer Workshops along with Dept of Labor and State Tax Commission News stories on misclassification of workers e-related-1 Send quarterly Employer Newsletter that includes articles regarding Misclassified Workers as well as other employer topics Have information on web page jobs.utah.gov

21 Partner with other state and federal agencies to obtain leads and share investigations on potential misclassified workers Work with other state agencies to provide employer outreach and spread the message about misclassified workers and negative results for a business Take every opportunity to educate employers on UI rules, policies, expectations and consequences for not adhering to those rules workshops, presentations, etc. Reach out to employers, Chambers of Commerce, Trade Associations and legislative groups to provide this education

22 Jody McMillan Utah Chief of Contributions Eileen Rivera Field Audit Manager