CASBO Connecticut Association of School Business Officials

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1 CASBO Connecticut Association of School Business Officials Timely Topics Workshop Friday, March 4, 2011 The Hawthorne Inn, 2421 Berlin Turnpike, Berlin, CT (Directions on CASBO website SCHEDULE 8:30 a.m. Registration Sign-in required for CEU verification. Coffee and pastry served. 8:50 a.m. Welcome & Introduction of Speaker Nancy Cole, President & Rick Belden, Vice-President 9:00 a.m. Teachers Retirement Fund The Ins, The Outs, and How to Save $$ James Stirling, Stirling Benefits Mr. Stirling will cover vital information on the Teachers Retirement Fund, including: How it works, how it is funded, how districts can leverage state money to reduce their obligation. 10:30 a.m. Contractual Risk Transfer & Additional Insured Issues Ryan Suerth, Saxe Doernberger & Vita, PC This presentation is intended to provide attendees with an introduction to issues regarding the transfer of risk through contractual indemnity and additional insured coverage. 12:00 Noon Lunch 1:00 p.m. Extracurricular Clubs & IRS Considerations Raymond Cassella, Esq., Shipman & Goodwin Did you know that the IRS could consider that consultant hired by a booster club to be an employee? You ll learn this and related issues when you attend this session. Attorney Cassella will address volunteer vs. paid coaches, SS-8 forms, policies and employment/background checks on volunteers, and more. 2:30 p.m. Waiting for Superman Sharon E. Smith, Glastonbury Public Schools The book is authored by Karl Weber and is described by Amazon.com as: The American public school system is in crisis, failing millions of students, producing as many drop-outs as graduates, and threatening our economic future. By 2020, the United States will have 123 million high-skill jobs to fill and fewer than 50 million Americans qualified to fill them. Educators, parents, political leaders, business people, and concerned citizens are determined to save our educational system. Waiting for "Superman" offers powerful insights from some of those at the leading edge of educational innovation. Please read the book and/or watch the movie and plan to participate in this interesting discussion led by Sharon Smith. 3:30 p.m. Conclude CASBO Members are encouraged to invite guests of the district to whom this program will be of interest. Schedule, topics, and speakers are subject to change. Program outcomes: Attendees will gain a better knowledge of health insurance & Medicare requirements, certificates of insurance, IRS considerations and education funding. This workshop will provide attendees with.5 CEU credits. To qualify for full CEU credits; you must sign-in by 9:00 a.m. and sign-out no earlier than 3:00 p.m. To qualify for.3 CEU credits, you must sign-in by 9:00 a.m. and sign-out no earlier than 12:00 p.m CASBO Timely Topics Workshop March 4, 2011 (Please print duplicate for additional registrants. Register online at Name: Ed IN #: District/Company: Street: Town: Zip: Phone: FAX: Special Needs? Meal Choice (please select one): Chicken Valencia Broiled Salmon w/citrus Butter Prime Rib Registration Fees Please complete: Full Member $0/person $ Regular or Associate Member $150/person $ Employee(s) of a district attending with a Full or Regular $85/person $ Non-Member $155/person $ Registration should be completed by February 28, 2011 Registrants will be subject to full payment unless canceled by February 28, Questions? Call Sharon Bruce at (860) Please return to: CASBO, Attn. Lori Klick, 111 Charter Oak Avenue, Hartford, CT or fax: (860)

2 Contractual Risk Transfer and Additional Insured Issues by Ryan M. Suerth March 4, 2011 Connecticut Association of School Business Officials Risk Transfer 3 rd Party Liability Insurance CGL Professional Pollution Additional Insured Coverage 1 st Party Insurance Builders Risk Subcontractor Default Insurance Subcontractor Indemnity Contractual Rights Commercial Property Risk Transfer through Contract Subcontract, purchase order, invoice, side agreement Specific paragraphs for indemnity/insurance May shift payment of loss/damage and defense Limited by anti-indemnity laws

3 Contractual Indemnity: What is Covered? Not Covered Covered Indemnity Liability Contractual Indemnity v. AI Coverage AI coverage and indemnity operate independently Indemnity covered as contractual liability AI coverage determined by policy and AI endorsement AI coverage not limited by states antiindemnity laws (exceptions) Benefits of AI Status Supplement to contractual indemnity Protects AI from own negligence and vicarious liability Prohibits subrogation Avoids impact to AI s loss history

4 Additional Insured Issues Who is an Insured? Blanket Endorsement Specifically Named Notice to Insurer Evolution of the AI Endorsement CG Arising out of CG Limits coverage to ongoing operations CG Excludes coverage for completed operations CG Reinstates completed operations coverage CG Replaces arising out of with caused in whole or in part. Excludes completed operations Modify the Contract Sample Manuscript Language (best): Subcontractor is required to add contractor as an additional insured per (CG ) endorsement or equivalent (CG is acceptable if it is accompanied by CG or CG and CG ). All coverage shall be primary and non-contributory with any other insurance available to contractor or owner.

5 Recommendations for Contract 1. Obtain AI status 2. Specify AI endorsement 3. Specify limits required 4. Specify that all AI coverage (whether purchased as primary, excess, or umbrella) shall be primary to any other insurance maintained by municipality 5. Specify that municipality s insurance will be excess of and not contribute with AI coverage regardless of other insurance clause 6. Obtain broad indemnification from subcontractor/vendor Certificates of Insurance Do not rely on certificate of insurance as evidence that you are an AI Obtain all policies and endorsements at start of each project from the subcontractors/vendors including all renewals At a minimum obtain declaration page, AI endorsement and certificate of insurance TIPS Always give notice and think of potential AI coverage when claim occurs Review AI endorsements carefully for compliance with your contracts Fight AI denials claiming that first named insured was not negligent Don t confuse indemnity and AI status If providing indemnity, make sure your insurance covers your contractual obligation

6 Thank you! Ryan M. Suerth SAXE DOERNBERGER & VITA, P.C.

Paid Volunteers(?) and Worker Tax Status Misclassification CASBO March 4, 2011 Workshop Ray Casella Shipman & Goodwin LLP 860-251-5808 rcasella@goodwin.

7 Paid Volunteers(?) and Worker Tax Status Misclassification CASBO March 4, 2011 Workshop Ray Casella Shipman & Goodwin LLP Here Is The Scenario: You are walking by the high school auditorium and you hear the jazz band practicing for an upcoming concert. You look in the auditorium and see that, in addition to the high school music teacher, two volunteers, both former students, are helping the music teacher with the rehearsal. You recognize the two former students, L. Gaga and J. Bieber. Though you would like to stay and listen to the jazz band s rehearsal, duty calls and you return to you office. You get back to your desk, you sit down, and Here Is The Rest Of The Scenario: there is a letter addressed to you from the IRS. The letter states that the IRS received a request from J. Bieber to determine his correct tax status for services performed for the high school even though his remuneration was paid by the high school booster club. Also included in the IRS letter is an IRS Form SS-8. The IRS wants you to complete the Form SS-8, you to sign it under the penalties of perjury, and you to return it to the IRS within 10 days. If you don t, the IRS will make its determination without your input. 1

8 Here Is More Of The Rest Of The Scenario: You re surprised! You thought J. Bieber was a volunteer. You call the music teacher who tells you that the booster club pays J. Bieber an annual stipend to volunteer for the jazz band. You think, paid volunteer, isn t that an oxymoron? You call the president of the booster club who says don t worry, we issued J. Bieber a Form Shortly after the call, the president of booster club calls back and tells you that she too received a similar letter, and Form SS- 8 from the IRS. What Is The IRS s Issue? The issue is whether the worker is an employee who should get a W-2 or an independent contractor who should get a It does not matter that the worker is called a volunteer. It does not matter that the payment is referred to as a stipend. It does not matter that the school is NOT the organization paying the worker. Why Does The IRS Care? Why Does The IRS Care? After all, the worker was issued a He will have to pay income tax and self employment (FICA) tax. The IRS Cares Because: High noncompliance by independent contractors Timing of tax payments (weekly v. quarterly) Common law rights afforded employees 2

9 What Is IRS Form SS-8? See The Attached Handout Material Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, is a questionnaire that the IRS uses to determine if a worker is an employee or independent contract. It is used to get information from the parties involved. It is reviewed by a special branch of the IRS whose sole function is to determine if workers are properly classified. This IRS branch does not conduct audits or make assessments. However, it sends its finding to branches that do conduct audits! The form follows the worker classification process (20 factor tests and 3 categories of evidence) that we will discuss. Why Is This Such An Important and Timely Tax Topic? Increased Audits! Increased information sharing among the IRS, DRS and DOL! The Connecticut Joint Enforcement Commission! The political evolution of the topic ( )! Back To The Scenario: Why Is The School Involved? The school is involved because the determination of a worker s status as an employee or independent contractor is based upon the relationship between the service recipient (the school) and the service provider (J. Bieber). Once that relationship is determined, that relationship (employee and employer - or - independent contractor and client) is imposed upon the payor (the booster club) and the payee (J. Bieber). 3

10 The Big Question! If J. Bieber was misclassified by the booster club as an independent contractor, is the school liable for the income taxes and FICA taxes that should have been paid to the IRS with respect to J. Bieber s wages? The Not-So-Big Answer! No! The General Rule. For income tax withholding and FICA tax purposes, the term employer means the person for whom an individual performs any service as the employee of such person. The Exception. If the person for whom the individual performs the services does not have control of the payment of the wages for such services, the term employer means the person having control of the payment of the wages. The school does not control the payments to J. Bieber. The school is not in any position to withhold taxes from his paychecks. The School might not even be aware he is being paid for volunteering. So What Does All This Mean? It means that the determination of whether a worker is an employee or independent contractor is very important. The distinction applies to a booster club s worker as well as to an individual providing services (and being paid directly by) a board of education or public school system. In our scenario, if J. Bieber was misclassified as an independent contractor, the booster club would likely be liable for federal and state income taxes, federal and state tax penalties and federal and state interest charges. 4

11 What Are The Financial Consequences of A Misclassification Federal Income Tax Withholding Penalty: 1.5% (innocent mistake issued); 3.0% (innocent - no 1099); 100% intentional CT Income Tax Withholding Penalty: The tax that should have been withheld, typically 5% of the misclassified wages Employer s share of FICA (OASDI and Medicare): 7.65 of the misclassified wages FICA Penalty for Failing to Withhold the Employee s Share of FICA: 20% of employee share if 1099 filed (1.53% of the misclassified wages) 40% of employee share if 1099 not filed (3.06% of the misclassified wages) Misc. Fed Penalties (not an inclusive list): 25% failure to file return or pay tax; 10% failure to make tax deposits Misc. CT Tax Penalties: 10% Negligence; 25% Intentional FUTA and SUTA and Dept. of Labor Penalties Possible criminal prosecution Example: Assumptions: Independent contractor is paid $100,000. The contractor is reclassified as an employee. The error was an innocent mistake. The employer timely filed a Form 1099-MISC with respect to the worker. Example: Calculations Federal Income tax 1.50% $ 1,500 Employer 7.65% $ 7,650 Employee 1.53% $ 1,530 FUTA Tax 6.2% $ 4 34 Subtotal $11,114 Failure to File/Pay $ 2,779 Failure to Deposit 10% $ 1,111 Total (without interest) $15,004 5

12 Example: Calculations Connecticut Income tax 5.0% $ 5,000 Negligence $ 500 Total Connecticut (without interest) $ 5,500 Combined Federal & State Federal $15,004 State $ 5,500 Total (without interest) $20,504 Interest and Other Consequences: Federal Interest Rate Currently 3% per annum (4% last year, 9% in 2000) Connecticut Interest Rate 1% Per Month 12% per annum Responsible Person Penalty (Fed & CT) 100% Penalty on person responsible to withhold taxes if that person fails to turn over such taxes to the IRS or DRS Failure to File Forms W-2 (Federal) $50 per W-2 (up to $100,00) if negligence $100 per W-2 (no Max!) if intentional How To Determine If A Worker Is Properly Classified: Generally, three types of workers are employees: Corporate officers Statutory employees Common law employees 6

13 How To Determine If A Worker Is Properly Classified: Common Law Employees The Rule A worker is an employee if the service recipient has the right to control the service provider, not only as to the result to be accomplished, but also as to the details and means by which that result is accomplished. The Tests 20 factor test Three categories of evidence How To Determine If A Worker Is Properly Classified: Common Law Employees Right to Control It is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if the employer has the right to control. The 20 Factor Test: 20 factors have been developed to help determine if an employee-employer relationship exists. The importance of each factor depends on the occupation and the facts in each case. The factors are weighed against each other, and based upon the facts in each case, a determination is made. The employer and the IRS often disagree with respect to the importance of each factor and the overall outcome of the analysis. 7

14 The 20 Factors: See the Attached Handout Material Instruction Training Integration Services rendered personally Assistants Continuity of relationship Setting of hours Full time requirement Work location Sequence of work Required reports Payment terms/frequency Travel expenses Furnishing tools Significant investment Profit or loss potential Multiple service recipients Service available to public Worker s right to terminate Right to discharge Three Categories of Evidence: The Evolution of the 20 Factor Test The common law 20 Factor Test has evolved into three categories of evidence used to determine if the right to control the means by which a worker accomplishes the work exists. Behavioral Control Evidence Financial Control Evidence Relationship of the Parties Evidence Three Categories Of Evidence: Behavioral Control Evidence Behavioral control evidence includes facts that show whether the business has a right to direct and control how the worker does the task for which she is hired. Related Factors: Instruction Training Services rendered personally Assistants 8

15 Three Categories Of Evidence: Financial Control Evidence Financial control evidence includes facts that show whether the business has a right to control the business aspects of the worker's job. Related Factors: Payment of travelling expenses Furnishing tools Significant investment Potential for profit or loss Three Categories Of Evidence: Relationship of the Parties Evidence Relationship of the parties evidence shows how the business and the worker perceive their relationship. Related Factors: Contracts Benefits Continuity of the relationship Integration Back to Form SS-8: See The Attached Handout Material Look at the Parts of Form SS-8 General information Behavioral control Financial control Relationship of the worker and the firm v. 2 9

16 The 20 Factors 20 factors have been developed by case law to help determine if an employee-employer relationship exists. The degree of importance of each factor varies depending on the occupation and the facts in each case. 1. Instructions. A worker required to comply with another person s instructions about how, when, and where to work is usually an employee. 2. Training. Training a worker can indicate that the worker is an employee. 3. Integration. Integration of the worker s services into the business operations generally shows that the worker is subject to direction and control. 4. Services Rendered Personally. If the work must be rendered personally it usually indicates that the worker is an employee. 5. Hiring, Supervising and Paying Assistants. If the worker hires, supervises and pays assistants, it usually indicates that the worker is an independent contractor. 6. Continuing Relationship. A continuing relationship between the worker and the person for whom services are performed can indicate that an employer-employee relationship exists. 7. Set Work Hours. Hours set by the payor is a factor indicating control and thus an employee-employer relationship. 8. Full Time Required. Employee: Contractor: If the worker must devote full time to the payor s business, as this restricts the worker from doing other gainful work. If the worker is free to work when and for whom he/she chooses v1

17 9. Doing Work on Employer s Premises. Look to who controls where the work is done Employee: However: If the work is done on the employer s premises The importance of this factor depends on the nature of the services involved and the extent to which an employer generally would require that employees perform such services on the employer s premises. 10. Order or Sequence Set. If the worker must perform services in the order set by the payor, this indicates control and employer-employee status. 11. Oral or Written Reports. Requiring the worker to submit regular reports to the payor indicates control. 12. Payment. Payment by the Hour, Week or Month points to an employee-employer relationship, unless this is just a convenient way to pay a lump sum job. 13. Payment of Travelling Expenses. This usually indicates an employer-employee relationship. 14. Furnishing of Tools and Equipment. This usually indicates an employer-employee relationship. 15. Significant Investment. If the worker invests in facilities that are used by the worker in performing services it usually indicates that the worker is an independent contractor. However, some employees are permitted to work in home offices. 16. Realization of Profits or Loss. If a worker can realize a profit or loss as a result of the services it indicates that the worker is an independent contractor. 2

18 17. Working for More Than One Firm at a Time. Generally: However: This indicates that the worker is an independent contractor. People (employees) can have more than one job. 18. Making Service Available to the General Public. Making your services available to the public on a regular and consistent basis indicates an independent contractor. 19. Workers Right to Terminate the Relationship. If the worker can end the relationship at any time without incurring liability it usually indicates an employer-employee relationship. 20. Right to Discharge. Employee: Contractor: The right to discharge generally indicates an employee. Usually can not be fired so long as the work produced meets the contract specifications. 3

Coverage for Contractual Risk Transfer and Additional Insured Issues. Jeffrey J. Vita and Edwin L. Doernberger Saxe, Doernberger & Vita, P.C.

Coverage for Contractual Risk Transfer and Additional Insured Issues Jeffrey J. Vita and Edwin L. Doernberger Saxe, Doernberger & Vita, P.C. 1 Outline Introduction Contractual Indemnity Additional Insured