Government Agencies Partner to Enforce Independent Contractor Misclassifications; IRS Offers Risky Settlement Program

October 25, 2011
The U.S. Department of Labor (DOL) recently signed a memorandum of understanding (MOU) with the Internal Revenue Service (IRS) that is aimed at improving departmental efforts to end the misclassification of workers as independent contractors.  The MOU will enable DOL to share information and coordinate law enforcement with the IRS in what DOL says will “level the playing field for law-abiding employers and ensure that employees receive the protections to which they are entitled under federal and state law.” In addition, state labor commissioners and other agency leaders representing Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington have also signed MOUs with DOL’s Wage and Hour Division and, in some cases, DOL’s Employee Benefits Security Administration, Occupational Safety and Health Administration, Office of Federal Contract Compliance Programs and Office of the Solicitor.  DOL also announced plans for MOUs with the state labor agencies of Hawaii, Illinois and Montana, as well as with New York’s attorney general. These agreements were established as a part of DOL’s Misclassification Initiative aimed at restricting the lack of access to various employee benefits and protections to which workers may be entitled as regular employees, but not as independent contractors, while simultaneously curbing the losses of Social Security, Medicare and unemployment insurance taxes that employers are required to pay for employees.  As a result of the initiative, employers are urged to conduct self-audits to evaluate the level of vulnerability should a worker or the government claim a worker’s status as an employee instead of an independent contractor.  Questions to consider include, but are not limited to, whether or not:
  • the worker’s services are an integral part of the organization’s activities;
  • the worker has a significant investment in facilities or equipment;
  • the worker has an opportunity for profit or loss in a business sense;
  • the worker exercises the initiative, judgment and foresight of a business owner;
  • the working relationship is permanent or indefinite, rather than for a pre-determined time; and
  • the worker has meaningful control over the details of the work.
If, after conducting a thorough self-audit, it is determined that workers have indeed been erroneously misclassified, the IRS’s new Voluntary Classification Settlement Program (VCSP), which allows eligible employers the opportunity to get into compliance by making a minimal payment, may be an option for some employers.  The program requires a payment of just over one percent of the wages paid to the reclassified workers for the past year with no interest, penalties, or risk of a future audit related to the workers in question for any prior years.  However, while this option may seem enticing to employers, it does not come without risks.  While the program offers employers a safe harbor from further penalties by the IRS, it does not provide a safe harbor from investigation or penalties by other government agencies.  As a result of the MOUs, employers that participate in the program may very well be providing the best evidence for alleged wrongdoing, which may or may not be determined by the investigating agency as willful.  Again, the investigating agencies include several sub-agencies within DOL and numerous state agencies which will now share information between each other and all have the authority to independently audit a company’s practices.  While the VCSP program seems appealing, participation may have far reaching and unintended consequences for even well-intentioned employers. For assistance in determining a worker’s status as an employee or independent contractor, employers may use DOL’s e-Laws Advisor to help classify workers appropriately according to the Fair Labor Standards Act, a law that is enforced by DOL’s Wage and Hour Division.  For additional guidance with worker misclassification issues, AGC’s pre-recorded webinar series, “Advanced Issues about Worker Misclassifications: What Every Contractor Needs to Know” will help to guide employers through the process of correctly identifying workers as employees or independent contractors as well as exempt or non-exempt and can be purchased from the AGC Bookstore.  Further resources are available to AGC members and chapters on AGC’s Labor & HR Topical Resources webpage under the main category “Other Legal Issues” and subcategory “Independent Contractors.”
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