Independent Contractors: Another Legal Minefield for Employers Moderator: Pat Slovak Presenters: Hank Sledz and William Carroll

Transcription

1 Independent Contractors: Another Legal Minefield for Employers Moderator: Pat Slovak Presenters: Hank Sledz and William Carroll 2012 Schiff Hardin LLP. All Rights Reserved

2 INDEPENDENT CONTRACTORS V. EMPLOYEES: THE LATEST DEVELOPMENTS

3 The Current Environment Backlash from perceived abuses arising from contingent workforce boom commencing in the 90s. Cash-starved federal and state governments increasingly view IC classification as a tax dodge by companies.

4 The Current Environment (cont.) From the right: Re-classification seen as means of raising tax revenues, without enacting new taxes or increasing rates. From the left: Extend protection of employment laws to misclassified ICs who would otherwise be excluded from coverage.

5 The DOL s Perspective The law should confer independent contractor status only on those for whom it is appropriate - entrepreneurs who bear the risk of loss, serve multiple clients, hold themselves out to the public as an independent business, and so forth. The law should not provide incentives for misclassification of employees as independent contractors, which costs federal and state treasuries large sums in uncollected social security, unemployment, personal income, and other taxes.

6 The DOL s Misclassification Initiative September 2011 Memorandum of Understanding (MOU) between the DOL and IRS Information sharing and coordination re: enforcement activities as a means of reducing the tax gap. MOUs between DOL and individual states By September 2011, MOUs between DOL and 10 states.

7 The DOL s Misclassification Initiative (cont.) Three additional states California, Colorado, and Louisiana have subsequently entered into three-year MOUs. MOUs authorize sharing of broad categories of information, including unemployment compensation information and statistical information regarding specific industries.

8 Targeted Funding Aimed At Independent Contractor Misclassification Obama Administration s FY 2013 budget again includes special funding for Department of Labor to detect and deter companies from misclassifying employees as independent contractors.

9 Targeted Funding (cont.) FY 2013 budget allocates $14 million to fund efforts targeting independent contractor misclassification. 70% of budgeting to curtail misclassification is dedicated to states to recover unpaid unemployment and income taxes.

10 Section 530: Is the Safe Harbor in Danger? Allows employers audited for misclassification to claim safe harbor, avoiding any reclassification by the IRS and/or payment of federal taxes resulting from misclassification. Requirements: Must have a reasonable basis for treating workers as independent contractors. Must have consistently treated the workers as independent contractors. Must not have treated any substantially similar workers as employees.

11 Section 530 Under Fire: The Fair Playing Field Act of 2012 Introduced by McDermott (D-Wash) in House and Kerry (D-Mass) in Senate. Eliminates continued use of Section 530 safe harbor. Prohibits IRS from making retroactive assessments for past unpaid taxes under circumstances similar to those triggering the Section 530 safe harbor (e.g. reasonable basis exists for IC classification).

12 Section 530 Under Fire: The Fair Playing Field Act of 2012 (cont.) Requires businesses to notify independent contractors of federal tax obligations, labor and employment law protections, and right to seek IRS status determination. Requires Secretary of the Treasury to issue regulations clarifying the employment status of individuals for federal employment tax purposes.

13 IRS Voluntary Classification Settlement Program (VCSP) Announced by IRS in September Allow business to reclassify individuals it has treated as ICs, while avoiding payment of past payroll tax obligations and penalties.

14 IRS Voluntary Classification Settlement Program (VCSP) (cont.) Business must pay IRS 10% of employment tax liability (determined under reduced Section 3509 rates) that may have been due on compensation paid to workers for the most recent tax year. No penalties or interest assessed for unpaid taxes. Participants are exempt from employment tax audits for worker misclassification in prior years.

15 VCSP Eligibility Requirements Business must have consistently treated the workers as nonemployees, and must have filed all required 1099s for the workers for the previous three years. Business cannot currently be under audit by the IRS.

16 VCSP Eligibility Requirements (cont.) Business cannot currently be under audit concerning worker classification by DOL or by a state government agency. IRS has discretion to accept business application to participate.

17 Is VCSP Right for You? The Risks of Reclassification Audit trigger for DOL and/or state agencies? Amnesty limited to federal payroll taxes. Reclassification may come to attention of other agencies.

18 Is VCSP Right For You? The Risks of Reclassification (cont.) Wage and Hour Considerations Inquiries by reclassified employees. Wage and hour lawsuits arising out of period prior to reclassification. Claims for benefits relating to period prior to reclassification.

19 Congress Takes Aim: The Employee Misclassification Prevention Act Among other things, EMPA: Would amend the FLSA to impose strict recordkeeping and notice requirements on businesses with respect to ICs. Written notice to all workers informing them of classification as either an employee or nonemployee.

20 The Employee Misclassification Prevention Act (cont.) Notice directs workers to DOL website for information about the rights of employees under the law, and advises them to contact DOL if they have any questions about whether they have been misclassified. Requires companies to keep records of hours worked and wages for non-employees. Makes it unlawful to misclassify a worker as a non-employee.

21 The Employee Misclassification Prevention Act (cont.) Would create fines of up to $1,100 per employee for each violation of the law and fines of up to $5,000 for repeated or willful violations. Similar to bill pending in Senate (S.770) the Payroll Fraud Prevention Act.

22 State Legislatures Seize the Initiative In the past two years, 12 states passed laws aimed at curtailing the misuse of independent contractors. Ten other states passed laws targeting IC misclassification prior to 2010.

23 State Legislatures Seize The Initiative (cont.) California, Connecticut, Florida, Kansas, Maine, Nebraska, New York, Pennsylvania, Rhode Island, Utah, Vermont and Wisconsin. Additional legislation proposed in 18 jurisdictions.

24 California s Ban on IC Misclassification Effective January 1, Imposes stiff penalties for companies that engage in willful misclassification of employees as ICs. Willful misclassification occurs when worker is voluntarily and knowingly misclassified.

25 California s Ban (cont.) Penalties: Minimum of $5,000 and a maximum of $15,000 for each violation. Penalty for pattern or practice violations range from $10,000 to $25,000.

26 State Agencies Turn Up the Volume New York: Joint Enforcement Task Force on Employee Misclassification. Audits and joint enforcement actions aimed at IC misclassification. More than a dozen states with misclassification task forces, including: Connecticut, Iowa, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Hampshire, Oregon, Rhode Island, Tennessee, Utah and Vermont.

27 State Agencies Turn Up The Volume (cont.) Administrative claims for unemployment compensation benefits and workers compensation by ICs are on the rise.

28 The Classification Challenge GAO Report: The tests used to determine whether a worker is an independent contractor or an employee are complex, subjective, and differ from law to law. Inquiry typically accomplished through a multi-factor analysis, requiring consideration of numerous factors.

29 The Classification Challenge (cont.) Purpose and policies underlying specific remedial statutes must be considered. Tests differ for tax, unemployment, wage and hour, tort, or workers compensation purposes. Standards differ from state to state and from agency to agency.

30 Three Central Inquiries Does the company have the right to control the manner and means by which the worker accomplishes the end product of the engagement? What opportunity for profit or loss exists for the worker? Is the worker engaged in an occupation distinct from that of the company?

31 Loosening the Reins: Strengthening the Case for IC Classification Hours of work Amount of oversight re: day-to-day activities Ease restrictions on outside employment Compensation arrangements

32 Written IC Agreements: Substance Over Form Mere recitals and conclusory labels will accomplish little. Written agreements can be extremely useful in structuring the relationship and in furnishing clear evidence of the parties arrangement. Provide a solid framework for defending the classification. Avoid one size fits all agreements.

33 Mitigating the Risks Document factors relied upon in making the IC determination. Audit policies and benefit plans. Management training. Opinion letters from federal/state agencies or outside counsel.

34 QUESTION & ANSWER SESSION 2012 Schiff Hardin LLP. All Rights Reserved

35 Speakers Henry W. Sledz Jr. Panelist Schiff Hardin LLP William J. Carroll Panelist Schiff Hardin LLP Patricia Costello Slovak Moderator Schiff Hardin LLP Schiff Hardin LLP. All Rights Reserved