On Feb. 27, the Internal Revenue Service (IRS) announced the expansion of its Voluntary Classification Settlement Program (VCSP), which allows eligible employers the opportunity to participate in a low-cost option for correcting the status of misclassified workers from independent contractors to employees for future tax years. The program requires a payment of just over one percent of the wages paid to the reclassified worker for the past year with no interest, penalties, or risk of a future audit related to the workers in question for any prior years. While this option may seem enticing to employers, it does not come without risks. The program offers employers a safe harbor from further penalties by the IRS, but it does not provide a safe harbor from investigation or penalties by other government agencies. Details regarding the program’s modifications can be found on the IRS website.
In 2011, the U.S. Department of Labor (DOL) 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 and the IRS to share information and coordinate law enforcement 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.”
As a result of the MOU, 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.
In addition, state labor commissioners and other agency leaders have also signed MOUs with DOL. 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.