Obama Targets Employers that Misclassify Workers as Independent Contractors

President Barack Obama’s federal budget proposal for fiscal year 2011 includes $25 million for an initiative targeting the misclassification of employees as independent contractors.

Obama says the additional funds would be used to hire 100 additional enforcement personnel and to provide grants to states that are trying to curb the problem.

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New York Collects $389M in Misclassified Employee Aduits

The State of New York’s Joint Enforcement Task Force on Employee Classification has been very successful in collecting $389M in uncollected wages and $11M in unreported insurance taxes.

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U.S. 9th Circuit Court says IC can sue for Discrimination

A federal appeals court decision granting an independent contractor the right to sue an employer for discrimination could mean the U.S. Supreme Court will eventually decide to take up the issue.

The U.S. 9th Circuit Court of Appeals recently overturned an earlier court decision when it ruled in favor of a contractor’s right to sue the Yuma Regional Medical Center in Yuma, Ariz., after being turned down for a job there.

The 9th Circuit is the second federal appeals court that has ruled in favor of a contractor’s right to sue. Two others have ruled against such a right.

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Kerry takes aim at ‘Safe Harbor’, misclassification of workers

Another front is opening in the battle over the classification of workers as independent contractors. Sen. John F. Kerry, D-Mass., introduced legislation last week that would toughen standards for employers in transportation and other industries that use independent contractors. The bill introduced Dec. 15 is aimed at tightening a provision in the tax law that businesses argue simplifies the tax code but critics say allows employers to misclassify workers and avoid payments of benefits and unemployment taxes.

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UPS Overtime Suit Settles for $12.8 Million

A federal judge late last week advanced a mediated settlement for delivery drivers who claimed they were denied benefits and overtime by UPS Supply Chain Solutions because they were misclassified as independent contractors.

U.S. District Judge Phyllis Hamilton of the Northern District of California preliminarily approved the $12.8 million settlement in the class action involving about 660 potential class members.

The plaintiffs and UPS Supply Chain Solutions jointly filed the motion to approve the settlement, of which at least 83 percent will go to members of two proposed classes representing workers in California and nationwide. The plaintiffs will ask for up to $1.7 million in attorney fees for Oakland, Calif., firm Leonard Carder and up to $325,000 in litigation costs, among other fees, the motion said.

The proposed settlement came together after multiple all-day mediations with JAMS mediator Ronald Sabraw, according to the motion filed in November by lead plaintiffs counsel Lynn Faris of Leonard Carder and defense counsel Robert Kristoff, a partner in the San Francisco office of Paul, Hastings, Janofsky & Walker.

Faris, who is lead counsel in a similar case against FedEx Ground in the Northern District of Indiana, said companies considering whether to classify people as independent contractors “are likely to take this settlement as further indication that that’s a risky business choice.”

UPS has changed the way it uses independent contractors based on some of the allegations raised in this case, corporate spokeswoman Susan Rosenberg said Tuesday.

Hamilton set a fairness hearing for March 15.

Senate Bill Would Tighten Contractor Law

Kerry, co-sponsors take aim at ‘Safe Harbor’ in tax code, misclassification of workers
Sen. John F. Kerry, D-Mass., introduced legislation this week that would toughen standards for employers in transportation and other industries that use independent contractors.

The bill introduced Dec. 15 is aimed at tightening a provision in the tax law that businesses argue simplifies the tax code but critics say allows employers to misclassify workers and avoid payments of benefits and unemployment taxes.

Kerry is targeting Section 530 of the Revenue Act of 1978, known as the “Safe Harbor” provision. The provision allows employers to classify workers as contractors for employment tax purposes without undergoing a common law test of their status, unless the employer’s classification has no “reasonable basis” or fails certain requirements.

Kerry’s bill, the Taxpayer Responsibility, Accountability and Consistency Act of 2009, would require companies to file reports with the Internal Revenue Service on each corporate provider of property and service to whom they pay more than $600 a year.

It would make additional changes to Section 530 to reduce abuses, Kerry and the bill’s co-sponsors, all Democrats, said. “This is about leveling the playing field and ensuring that America’s workers receive the protections and pay they deserve,” he said.

New Year Wishes From The IRS

Happy New Year from the IRS! As 2010 quickly approaches so does the IRS’ National Research Project where 6,000 unlucky companies will have the unfortunate pleasure of being scrutinized by an IRS agent.

The agent’s main focus will be on:

• Form 1099 Independent Contractors – are they properly classified
• Executive pay and fringe benefits
• Expense reimbursement plan qualification

For any company out of compliance they will likely receive hefty fines and penalties to go along with the back taxes.

IRS to Audit 6,000 US Companies

The IRS will audit 6,000 U.S. companies to determine whether they pay all their required employment taxes to fund Social Security and Medicare benefits. The IRS said the audits will provide data for its first statistical analysis since 1984 of how often companies misclassify workers to duck tax obligations, fail to pay taxes on fringe benefits such as personal use of company cars, and improperly pay taxes for company executives. The audits will begin in February, and the companies will be randomly chosen. …

The Treasury Department in 2005 estimated, based on the 1984 IRS data, that companies underpay employer taxes by about $14 billion annually. In particular, federal agencies have raised concerns about whether employers are properly classifying workers as company employees or independent contractors.

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House Bill Would Prevent Improper Worker Misclassification

A bill that would remove a loophole, which allows employers to bypass the IRS’s test of whether a worker is an employee or an independent contractor, was reintroduced in the House on July 30, 2009. Called the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (H.R. 3408), the bill would make it more difficult for employers to avoid employment tax liability if they have misclassified a worker as an independent contractor and significantly increase employer penalties in the event of the misclassification.
Reasonable basis test

The bill would add a new section to the Code allowing employers to avoid employment tax liability only if they are able to demonstrate that they had a “reasonable basis” for classifying the independent contractor as an employee. This new Code Sec. 3511 would repeal the safe harbor provisions of current Section 530 of the Revenue Act of 1978.

The “reasonable basis” standard would be met if:

• the employer classified the worker as an independent contractor based on: (i) a written determination that it received addressing the employment status of either the worker in question, or another individual holding a substantially similar position with the employer; or (ii) a concluded employment tax examination stating whether the individual (or one holding a substantially similar position) should be treated an employee.

• the employer (or a predecessor) has not treated any other individual holding a substantially similar position as an employee for employment tax purposes for any period beginning after December 31, 1977.
For purposes of this new section, the determination as to whether an individual holds a position substantially similar to a position held by another individual would be made in accordance with the Fair Labor Standards Act. In addition, the bill provides that any individual who performs services for a taxpayer may petition (either personally or through a designated representative or attorney) for a determination of the individual’s status for employment tax purposes.

Penalty increases
Among other penalties, employers that misclassify employees as independent contractors would be subject to a minimum $250 penalty (an increase from the current $50 fine) per incorrect tax return, up to $3,000,000 (currently $250,000) per year. The penalty imposed could be lowered if the employer’s returns are corrected in a specified period of time. Employers with gross receipts not exceeding $5,000,000 would be subject to fines of up to $1,000,000 per year, up from the current $100,000 fine. Employers that intentionally disregard the filing requirement would be subject to a $500 fine per tax return, up from the current $100 fine. If enacted, the bill would apply to information returns required to be filed after December 31, 2009.

IRS Increases Business Audits

Starting November 2009 the Internal Revenue Service will be increasing business audits as it rolls out an NRP (National Research Program.) The IRS announcement of this NRP advises that it will be focusing on four areas: worker classification, fringe benefits, non-filers and officer’s/directors compensation (especially S corporations). An NRP is rather like an industry-wide audit, and the data gathered from this audit will be used to improve agency compliance efforts with regard to employment taxes.

This program creates a far greater likelihood of your company being audited over the next three years, because the scope of the audit is to randomly select up to 2,000 companies a year for the next three years for inclusion in this audit. Moreover, the NRP doesn’t replace standard IRS audits which will continue at their usual, escalating pace. The selection process is already underway, so there is nothing you can do to avoid being subject to an NRP audit. However, it isn’t too late to take steps to protect yourself, should you be one of the businesses selected for audit either as part of the NRP or outside the NRP.

For further information on steps that your company can take now to protect itself from assessments in connection with IRS audits under the new NRP, contact ICon.