Classification Class: Just Who Might Be Looking at that W-2 or 1099 VMGMA Fall Conference September 26, 2017 Prepared by: ROBERT J. BARRY, ESQ. rjbarry@kaufcan.com 757-624-3268 KAUFMAN & CANOLES, P.C.
Wage and Hour Division (WHD) Misclassification of Employees as Independent Contractors DOL says the misclassification of employees as independent contractors presents one of the most serious problems facing affected workers, employers and the entire economy.
The DOL Misclassification Initiative; 37 States and Hundreds of Auditors Yes, that s Us!
What Does This Mean in Virginia? The DOL s Wage and Hour Division (WHD) entered an agreement with the VEC with the mutual goals of providing outreach to employers, employees, and other stakeholders, enhancing enforcement by conducting joint investigations and sharing information consistent with applicable law.
Classification Class What Agencies May Be Watching You And Why? Federal IRS withholding of income tax, FICA and Medicare and employer match DOL payment of minimum wage, overtime, eligibility for FMLA EEOC claims of discrimination
Classification Class What Agencies May Be Watching You And Why? Virginia Department of Taxation withholding of income tax VEC payment of unemployment taxes Workers Comp Commission insurance coverage of employees Department of Labor and Industry prompt payment of wages and VOSH (employee safety)
Wage and Hour Division DOL says misclassified employees often are denied access to critical benefits and protections they are entitled to by law, such as the minimum wage, overtime compensation, family and medical leave, unemployment insurance, and safe workplaces.
Lost State and Federal Revenue Revenue Employee misclassification generates substantial losses to the federal government and state governments in the form of lower tax revenues, as well as to state unemployment insurance and workers compensation funds.
UNITED STATES DEPARTMENT OF LABOR What is "misclassification"? Misclassification refers to a worker who is an employee under the law but is incorrectly classified as something other than an employee (usually an independent contractor). Most federal and state labor laws protect workers who meet the laws definitions of employee.
GOVERNMENT ALTERNATIVE FACT Employee or Independent Contractor? DOL says the Department of Labor supports the use of legitimate independent contractors - who play an important role in our economy - but when employers deliberately misclassify employees as independent contractors in an attempt to cut costs, everyone loses.
10 Myths About Misclassification DOL says Misclassification of employees as independent contractors is a serious problem our country is facing. Here we dispel some of the pervasive myths about misclassification. Select the images below for information dispelling each myth.
MYTH #1: If I am an independent contractor under one law, I am an independent contractor under other laws. FACT #1: Even if you are a legitimate independent contractor under one law, you may still be an employee under other laws. The protections available under federal and state employment laws are generally available only to employees, and are generally not available to independent contractors. Federal laws have differing definitions of employment.
Under the Fair Labor Standards Act (FLSA), and the Family and Medical Leave Act (FMLA) most workers are employees, but the definitions in other laws may be a little less broad. Therefore, it is possible to not be an employee (and be, for example, an independent contractor) under one law, but be an employee under a different law (especially the FLSA and FMLA).
MYTH #2: If I am classified as an independent contractor, I am not eligible for unemployment insurance (UI). FACT #2: You may still qualify for UI even if you are classified as an independent contractor. Each state follows its statutes, regulations or policies to determine whether an employer-employee relationship exists. Even if you are considered to be an independent contractor by a business entity the state UI agency will make a determination as to whether that classification is correct under its laws or whether you are an employee and eligible for UI.
MYTH #3: I received a 1099 tax form from my employer, and this makes me an independent contractor. FACT #3: Receiving a 1099 does not make you an independent contractor. You may be an independent contractor if your work does not fall within a law s definition of employment. Similarly, you are an employee if your work falls within a law s definition of employment. Receiving a 1099 tax form is simply the result of how your employer classifies you for federal tax purposes, but the form itself does not mean you are correctly classified as an independent contractor for federal tax purposes.
MYTH #4: It does not make a difference if I am classified as an independent contractor or an employee. FACT #4: If you are misclassified as an independent contractor, you may be denied benefits and protections to which employees are legally entitled. Misclassification also has negative effects on businesses.
Typically, only workers who are employees have access to important benefits and protections under certain federal, state, and local laws. Among others, these benefits and protections may include: The right to minimum wage, overtime pay The right to unpaid, job-protected family and medical leave Certain anti-discrimination and anti-retaliation protections The availability of workers compensation if you are injured on the job The availability of unemployment insurance (UI) Employer payment of half of the Social Security and Medicare Taxes Misclassification also hurts law-abiding business owners who don t get to compete on a level playing field when some employers wrongly classify their workers as independent contractors and thereby lower their costs unlawfully. In addition, federal and state governments lose billions of dollars each year in tax revenue as a result of misclassification.
MYTH #5: I am an independent contractor because I signed an independent contractor agreement. FACT #5: Signing an independent contractor agreement does not make you an independent contractor.
As a condition to being allowed to work, employers sometimes require workers to sign an agreement stating that the worker is an independent contractor. Under the FLSA and FMLA, you are an employee if, as a matter of economic reality, your work indicates that you are economically dependent on an employer, and you are an independent contractor if you are in business for yourself. Any label that you or the employer give to the relationship, even in an agreement signed by you, is irrelevant. Similarly, for federal tax purposes, signing an independent contractor agreement does not make you an independent contractor. It may be just one relevant fact in determining the relationship of the parties
MYTH #6: I am not on the payroll, so I am not an employee. FACT #6: Even if you are not on the payroll, you may still be an employee. Whether you are on the payroll does not determine if you are an employee or an independent contractor. You are an employee if your work falls within a law s definition of employment. On the other hand, you may be an independent contractor if your work does not fall within a law s definition of employment.
Some laws require employers to keep employment records for their employees. However, your employer may not be fulfilling these obligations if you are misclassified as an independent contractor, if you are not on the business payroll, or if you are paid in cash off-the-books. DOL will accept an employee s time records if the employer has not kept them.
MYTH #7: My employer wants me to be an independent contractor, and that means I am not an employee. FACT #7: Your employer cannot misclassify you for any reason. Your employer cannot classify you as an independent contractor just because it wants you to be an independent contractor. You are an employee if your work falls within a law s definition of employment. How your employer wants to characterize you is irrelevant to determining whether you are an employee. What matters is whether the reality of the situation indicates that you are economically dependent on the employer (an employee) or in business for yourself (an independent contractor).
MYTH #8: I telework or work off-site, so I am an independent contractor. FACT #8: You are not an independent contractor simply because you work off-site or from home. Working away from your worksite, such as from your home, does not necessarily make you an independent contractor. Both employees and independent contractors may telework or work off-site. Similarly, both employees and independent contractors may work at a work site. Your employer may still control or have the right to control how you do your work under the relevant law even if you work off-site and are not subject to constant supervision.
MYTH #9: I have been an independent contractor for years; this means I will continue to be an independent contractor. FACT #9: Being a bona fide independent contractor in the past does not mean you will always be an independent contractor. Even if you have been a legitimate independent contractor for a long time, you could become an employee in the future if the nature of your work relationship changes. You are an employee if your work falls within a law s definition of employment. The present nature of your work relationship (and not your previous status) determines whether you are an employee or not.
MYTH #10: I am an independent contractor because it is established practice in my industry to classify workers like me as independent contractors. FACT #10: Common industry practice is not an excuse to misclassify under the FLSA. Regardless of the industry practice, if your work falls within a law s definition of employment, you cannot be classified as an independent contractor and denied your rights as an employee under that law. What matters is whether the reality of the situation indicates that you are economically dependent on the employer (an employee) or in business for yourself (an independent contractor). For federal tax purposes, what matters is whether the employer has the right to control how you do your work (however, there is a special relief provision (Safe Harbor) for federal employment tax purposes under which industry practice may be relevant). See The 20 Factor Test.
ABC Test Definition A test used in some states to determine whether a person is an employee or an independent contractor for the purpose of determining state unemployment tax. Some courts using this test look at whether a worker meets three separate criteria to be considered an independent contractor: 1) The worker is free from the employer's control or direction in performing the work. 2) The work takes place outside the usual course of the business of the company and off the site of the business. 3) Customarily, the worker is engaged in an independent trade, occupation, profession, or business.
The Economic Realities Test Whether the work is integral to the company s business. A worker who is performing the essential work of the company such as manufacturing the products it sells or providing the service it markets is more likely to be classified as an employee. A worker who performs tangential work such as painting the offices of a law firm or designing a website for a furniture store is more likely a contractor. Whether the worker has an opportunity to turn a profit (or realize a loss). An independent contractor sets the price for the work and can charge as much as the market will bear. An employee, on the other hand, typically earns an hourly wage or salary, regardless of the company s fortunes. Whether the worker invests in equipment and facilities. An employee generally works at the employer s place of business, using tools and supplies provided by the employer. An independent contractor typically provides the material necessary to do the job and might work from home or his or her own office.
Whether the job requires special skills and initiative. An independent contractor is running a separate business, often competing with others for work in the open market. A contractor typically also has specialized skills, such as training as an electrician or landscape designer. The length and permanence of the job. Typically, a contractor works by the project, performing one job for a company and then moving on. A contractor might also work for multiple companies at once. A long-term or open-ended job arrangement looks more like an employment relationship. How much control the company has over the way the job is done. An employer has much more control over an employee, including the ability to set pay, hours, tasks, procedures, and otherwise dictate how the work gets done. An independent contractor, on the other hand, might be given specifications from the company as to the final product, but generally determines how and when to do the work.
IRS 20-FACTOR TEST
IRS 20-FACTOR TEST
IRS 20-FACTOR TEST