Worker Misclassifications and How to Avoid Them
Substantial enforcement developments from government agencies focusing on worker classification compliance are putting employers on notice. Learn about the issues affecting businesses nationwide and the key steps to take immediately.
Five Questions About Worker Misclassifications
- What is the impact of the Employee Misclassification Prevention Act (EMPA)?
- What plans does the Internal Revenue Service (IRS) have to audit certain industries?
- What are the fines for misclassification of workers or recordkeeping violations?
- What type of classification testing can be used to ensure proper employee classification?
- What are five tips that can be used to help classify workers properly?
Learn How to Avoid Worker Misclassifications
To learn the answers to these questions and much more, be sure to listen to Worker Misclassifications and How to Avoid Them in this month’s HRCast, a recording provided by our team of HR Pros and available exclusively on MyHRSupportCenter.
MyHRSupportCenter Provides Alerts, Best Practices, and HR Tools Every Day
Visit MyHRSupportCenter regularly, not only for our HRCasts, but also to get late-breaking compliance alerts, best practices to implement, and HR tools to use every day. If you haven’t yet signed up and would like a free trial of MyHRSupportCenter, contact Vision Payroll today.
Time to Conduct Your Contractor Classification Check-ups
Employers may unknowingly trigger risks of labor violation penalties and fines by improperly classifying individuals as independent contractors. By doing so, employers may also be denying workers certain employee benefits (e.g., overtime and the federal Family Medical Leave Act). In fact, a 2007 Cornell University study had estimated the average unemployment insurance taxable wages (from 2002-2005) that were left underreported due to employers misclassifying workers as independent contractors was $4.28 billion for the state of New York alone.
Classify Employees and Independent Contractors Correctly
Employers need to take the following steps to respond proactively to recent changes:
- Become aware of developments and efforts relating to the “Worker Classification Initiative,”
- Know the various types of tests such as the 20-factor test used by the Internal Revenue Service (IRS) to distinguish between employees and independent contractors, and
- Take certain immediate actions in light of increased enforcement by the US Department of Labor.
Find Out More About Conducting Your Contractor Classification Check-ups Now
For more information, be sure to read the featured article by the HR pros at MyHRSupportCenter, Time to Conduct Your Contractor Classification Check-ups. If you’re not yet signed up or would like a free trial of MyHRSupportCenter, contact Vision Payroll today.
MA Attorney General Martha Coakley
The office of Massachusetts Attorney General Martha Coakley
recently announced a settlement with FedEx Ground over claims that FedEx Ground misclassified drivers as independent contractors rather than employees. As a result, it was alleged that FedEx Ground underpaid payroll taxes, workers’ compensation and unemployment assistance.
“We have made enforcement against employer misclassification a priority because employers who misclassify workers are gaining an unfair advantage over their competitors and unfairly depriving the Commonwealth of tax and other revenues,” AG Coakley said. “With today’s agreement, we have recovered $3 million owed to taxpayers and taken a step to level the playing field for businesses. I want to thank Governor Patrick and his Executive Office of Labor and Workforce Development and the Department of Revenue for assisting in the investigation and resolution of this matter.”
In 2007, the Attorney General’s Office cited FedEx Ground for violation of the Independent Contractor Law, by misclassifying its drivers, failing to provide a proper paystub, failing to provide workers’ compensation, not paying overtime to certain drivers, and neglecting to deduct and withhold state income taxes. FedEx Ground appealed the matter to the Division of Administrative Law Appeals (DALA). The Attorney General’s Office citations against Fed Ex Ground included penalties of more than $190,000.
While FedEx Ground’s appeal was pending before DALA, the Attorney General’s Office coordinated further investigation with the Executive Office of Labor and Workforce Development and the Department of Revenue into FedEx Ground’s business practices. The joint investigation revealed that FedEx Ground’s misclassification of employees had resulted in significant underpayments to the Department of Revenue, Division of Industrial Accidents and Department of Unemployment Assistance.
The settlement amount includes these significant underpayments. The settlement also provides for a payment for the 13 drivers named in the Attorney General’s citation. FedEx Ground drivers in Massachusetts have brought their own lawsuit against FedEx Ground that remains pending and is not affected by this settlement. FedEx Ground denies liability in the settlement.
Massachusetts uses a three-factor test to determine if service providers should be considered employees or independent contractors. Due to increased enforcement and significant penalties for misclassification, Vision Payroll strongly recommends employers consult with a competent labor law attorney to help determine status of workers as employees or independent contractors.
In a response to Senator Dianne Feinstein (D-CA), the Internal Revenue Service (IRS), in Information Letter 2010-0001, explains how to determine if a worker is an employee for federal income tax withholding purposes.
The determination of employee or independent contractor status is a question of facts and circumstances. According to the IRS response, “[t]he regulations that provide the criteria for determining an individual’s status as an employee or independent contractor for income tax withholding purposes are found in section 31.3401(c)-1 of the Employment Tax Regulations.
The designation of a worker as an employee or independent contract by either or both parties is not relevant to the determination of the worker’s status. The determination comes down to who has the right to direct and control the individual performing the work not only to the result, “but also as to the details and means by which that result is accomplished.” Relevant facts to make the determination generally fall into one these three categories:
- Behavioral controls,
- Financial controls, and
- The relationship of the parties.
The IRS recommends preparing and filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, if a determination is needed of a particular worker’s status.
State laws for income tax withholding, unemployment taxes, or workers’ compensation may have different rules for determining if an employer-employee relationship exists. Due to increased enforcement and significant penalties for misclassification, Vision Payroll strongly recommends employers consult with a competent labor law attorney to help determine status of workers as employees or independent contractors.
On May 5, 2010, Governor M. Jodi Rell of the State of Connecticut signed into law Public Act 10-12, An Act Implementing the Recommendations of the Joint Enforcement Commission on Employee Misclassification. Under the law, effective October 1, 2010, the penalty for misclassifying workers as independent contractors goes from $300 per violation to $300 per day per violation. Additionally, the failure to properly classify workers with the intent to injure, defraud or deceive the state of Connecticut (in addition to insurance companies) by failing to pay workers’ compensation assessments or Second Injury Fund assessments is now a class D felony. Given the severe penalties for misclassifying workers in Connecticut, as well as increased enforcement at both the state and federal levels, Vision Payroll strongly recommends employers consult with a competent labor law attorney to assure compliance with federal and state worker classification laws.
This week’s question comes from Brian. We need more help in our business. We’re not sure if the person who’ll provide us services should be considered an employee. How do I know if someone is an employee or independent contractor? Answer: In Summertime Tax Tip 2009-20, the Internal Revenue Service (IRS) listed ten items a business should consider when deciding whether an individual is an employee or independent contractor. They are:
- Three characteristics are used by the IRS to determine the relationship between businesses and workers: Behavioral Control, Financial Control, and the Type of Relationship.
- Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
- Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
- The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.
- If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.
- If you can direct or control only the result of the work done — and not the means and methods of accomplishing the result — then your workers are probably independent contractors.
- Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.
- Workers can avoid higher tax bills and lost benefits if they know their proper status.
- Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8 – Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding – with the IRS.
- You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer’s Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS Web site or by calling the IRS at 800-829-3676 (800-TAX-FORM).
Contact Vision Payroll if you need further information.
This week’s question comes from Carolyn, a business owner. I read recently about statutory employees and would like to find out if some of our new hires would qualify as statutory employees. Can you tell me more about statutory employees? Answer: Common law considers some workers employees and some independent contractors. By statute, some independent contractors are treated as employees for employment tax purposes.
There are four categories of independent contractors that might be statutory employees:
A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.
A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.
An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.
A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson’s principal business activity.
If the independent contractor must perform the services personally as an explicit or implicit clause of the service contract, if the independent contractor does not have a substantial investment in the non-transportation facilities property and equipment, and the services are performed for the same payer on a continuing basis, then the payer must withhold social security and Medicare tax from payments to contractors.
For workers in categories 1 and 4 above who have payments subject to social security and Medicare tax under these rules, the payments are also considered wages for federal unemployment (FUTA) purposes. Payments to workers in categories 2 and 3 above are never considered wages for FUTA purposes.
Payments to statutory employees are never subject to federal income tax withholding.
Report payments to statutory employees on Form W-2, box 1, box 3 (to the wage limit), and box 5. Be sure to check the box 13 “Statutory employee” checkbox on the Form W-2. Statutory employees report the amount from Form W-2, box 1 on Form 1040, Schedule C, line 1 and complete the checkbox on that line. They may also deduct related business expenses on Schedule C, to the extent allowable by law.
Contact Vision Payroll if you have any questions on statutory employees.
California Attorney General Edmund G. Brown, Jr. recently filed suit against three trucking companies alleging that the companies improperly classified their employees as independent contractors. The suits filed against Guasimal Trucking, LLC, Noel A. Moreno and Emma R. Moreno, owners of Moreno Trucking, and Edmundo Jose Lira, operator of a trucking business. All three companies hire drivers to transport cargo from the ports of Los Angeles and Long Beach. The suits allege that by misclassifying their drivers the companies fail to pay Unemployment Insurance taxes, to pay Employment Training Fund taxes, to withhold and transmit State Disability Insurance taxes, to withhold State income taxes and file a withholding return, to provide workers’ compensation insurance, and to provide employees with pay stubs. All these items are required under various sections of California law. Please contact your labor law attorney immediately if you have questions on the proper classification of your workers as employees or independent contractors. Vision Payroll will work with you to help ensure proper taxes are paid, returns filed, and pay stubs provided.
Comments Off on Attorney General Files Suit against Companies for Misclassifying Employees as Independent Contractors
A court-appointed referee, retired California Superior Court Judge William J. Cahill, has awarded current and former drivers for FedEx Ground Package Systems, Inc. (FedEx) $14.4 million in expenses and interest. In 2005, the court granted judgment to the plaintiffs in a class-action suit against FedEx, a successor to the original defendant Roadway Package Systems, Inc (Estrada v. Fed Ex Ground, Los Angeles County Super. Ct. No. BC210130). The suit alleged that several drivers were improperly misclassified as independent contractors, not employees. As independent contractors, the drivers incurred expenses for fuel, vehicle maintenance, and insurance, among other costs. Since the drivers should have been classified as employees, these costs should have been paid by their employer, FedEx. In an order subject to a December hearing, only $32,000 of the requested expenses was denied.
Comments Off on FedEx Ground Ordered to Deliver $14.4 Million in Employee Dispute
Today and on the fifteenth of every month, Vision Payroll posts a new HRCast, a recording provided by our team of HR Pros. These recordings help you better manage your business and your most important asset, your employees. In prior months, topics covered included hiring tips, the difference between exempt and non-exempt employees, the independent contractor vs. the employee, and relationships in the workplace. These recordings run between five and ten minutes and provide a great overview of the topic. Search our HR site for more information on the topic or pose a question to our team of experts and receive your answer within one business day. If you’re not yet signed up or would like a free trial of MyHRSupportCenter, contact Vision Payroll today.
Comments Off on Tip of the Week: Listen to Our HRCasts for the Latest HR Tips, Information, and Best Practices