Independent Contractor or Employee? An Overview of the Misclassification Issue

Transcription

1 Independent Contractor or Employee? An Overview of the Misclassification Issue National Roofing Legal Resource Center s Philip J. Siegel, Esq. Hendrick, Phillips, Salzman & Flatt 230 Peachtree Street, Suite 2500 Atlanta, Georgia Fax pjs@hpsf-law.com 35 th Annual Seminar Austin, Texas September 12,

2 Independent Contractor v. Employee Misclassification occurs when a worker s employment status is incorrectly classified The law defines whether someone is an employee or an independent contractor Issuing someone a 1099 is not dispositive of the issue 2

3 Independent Contractors Risks v. Rewards 3

4 Independent Contractors Benefits to Employers an estimated 30% saving on labor costs: No obligation to comply with the FLSA No obligation to provide benefits No employment tax obligation owed to the IRS No obligation to provide unemployment or workers compensation coverage AND: You are not liable for the torts committed by independent contractors 4

5 Consequences of Misclassification Exposure to wage and hour claims Failure to pay minimum wage and overtime (you can still argue an exemption from OT pay applies) Liquidated, or doubled, damages Benefits claims Workers can recover the cost of benefits for which they would have been eligible if classified correctly Consider expense reimbursement Tax consequences - see next slide Attorneys fees, court costs, and, if intentional, punitive damages You may be in breach of contract Consider no subcontracting clauses in your subcontracts and applicator agreements 5

6 Tax Consequences of Misclassification Consider a worker classified as an independent contractor who was paid $50,000 over the year Full statutory tax rate is 25% for federal income tax withholding and 15.3% for the combined employer and employee portions of FICA. This equates to a full 40% or a $20, federal tax liability Add interest, fines and penalties, in addition to back payroll taxes Liability can be eliminated entirely if the taxpayer falls within the IRS safe harbor (discussed later) Section 3509 Relief - Liability can be reduced if 1099s were issued to ICs IRS Classification Settlement Program may apply if you are under audit IRS Voluntary Classification Settlement Program discussed later 6

7 Misclassification is a Hot Topic There has been an increased focus on whether workers are being properly classified Misclassification is a focus of the IRS, DOL, and the NLRB Federal and state legislation is being introduced on the issue There is a particular focus on the construction industry 7

8 Federal & State Legislation on Misclassification 8

9 Federal and State Legislation 113 th Congress has considered the following potential legislation: Employee Misclassification Act Payroll Fraud Prevention Act Fair Playing Field Act Rebuild America Act Independent Contractor Tax Fairness and Simplification Act DOL partnering with IRS States partnering with federal DOL: CA, CO, CT, HA, IL, IA, LA, MD, MA, MN, MO, MT, NY, UT, and WA Many states enacting legislation on this issue: AZ, CO, DE, IL, CA, CT, FL, KS, ME, NE, NY, PA, UT, VT, WI, and others 9

10 The Employee Misclassification Prevention Act Requires employers to notify new hires, in writing, about classification Current workers are to be notified, too Without notification, presumption is workers are employees Would require recordkeeping of ICs similar to that of employees under the FLSA Penalties of up to $5,000 per violation Willful violations invite treble damages 10

11 State Laws Colorado Misclassification of Employees as Independent Contractors Act Individuals are presumed to be employees Pennsylvania Construction Workplace Misclassification Act Individuals are presumed to be employees ICs must be customarily engaged in an independently established trade, occupation, profession or business Does the IC possess the essential tools and equipment Can the IC realize a profit or suffer a loss? Are the services performed through a business? Does the business have a separate location? Has the work been performed for others? Requirement to maintain liability insurance of at least $50,000 11

12 State Laws Maryland Workplace Fraud Act Applies to construction and landscaping industries only Presumption is worker is an employee, but there is a safe harbor Safe harbor requires a written contract and certificate of good standing from the tax department 12

13 State Task Force Initiatives 13

14 State Task Force Initiatives 14

15 State Task Force Initiatives 15

16 The Misclassification Issue Classification Tests 16

17 Classification Tests IRS Test FLSA Test Common Law Test NLRB Test ERISA Worker Classification Test ADEA Test COBRA Test OSHA Test Title VII Test State Tests 17

18 The FLSA Test The extent to which the work performed is an integral part of the employer s business Roofers engaging roofers scores one for the employee column Whether the worker s managerial skills affect his or her opportunity for profit and loss Is the IC hiring and supervising his workers The relative investments made in facilities and equipment by the worker and the employer Requiring ICs to have their own tools and equipment is not enough Is the IC sharing the risk of loss with you? 18

19 The FLSA Test (con t) The worker s skill and initiative Specialized construction skill is not enough Is the IC taking initiative to operate as an independent business? The permanency of the worker s relationship with the employer The more permanent or indefinite, the more it appears the individual is an employee The nature and degree of control by the employer The IC must control meaningful aspects of the relationship 19

20 The IRS Test Twenty Factor Test which considers (a) behavioral control, (b) financial control, and (c) the relationship of the parties the right of one person to tell a worker when, where, and how he or she is to work; one person training the worker; integration of the worker's services into the business' general operations; the requirement that services be rendered personally; direction over hiring, supervising, and paying assistants 20

21 The IRS Test (con t) a worker's continuing relationship with one business; set hours which the worker must work; the requirement that the worker devote full-time attention to one business; performing work on a business' premises; control over the order or sequence of work performed 21

22 The IRS Test (con t) the requirement that the worker submit reports to the person for whom work is performed; payment by hour, week, or month; compensation for business and/or traveling expenses; provision of tools and materials; the worker's investment in the facilities in which he works 22

23 The IRS Test (con t) a worker's direct interest in the profitability of the work accomplished working for more than one firm at the same time making services available to the general public a person's right to discharge the worker; and a person's right to terminate the work relationship 23

24 Common Law Test Seven Factors: the degree of control exercised by the principal over the details of the work which party invests in the facilities used by the worker the opportunity of the worker for profit or loss whether the principal can discharge the worker whether the work is part of the principal s regular business the permanency of the relationship the relationship the parties believed they were creating 24

25 The Misclassification Issue Example Cases 25

26 Example Misclassification Case Kurek v. IRS - United States Tax Court Construction company averaged projects during the year Company hired up to 20 workers per quarter to work on a project-by-project basis Workers set their own hours HELD: Workers were employees 26

27 Basis for Decision Degree of Control: Company set deadlines and monitored the work on a daily basis Investment in Facilities: Company supplied all heavy tools and reimbursed workers for materials purchased Opportunity for Profit and Risk of Loss: Workers were paid a flat fee and were unable to increase their earnings Right to Discharge: If deadlines were not met or work was unsatisfactory, workers could be replaced Integral Part of the Business: Completed projects were essential to the Company 27

28 Example Misclassification Case Texas Workforce Commission Worker furnished some of the tools for the work Worker used his own truck and paid for his gas Worker only worked jobs secured by the Company Worker charged fees set by the Company Customer payments went to the Company Company paid worker s work expenses Worker performed services under the Company s name HELD: Workers were employees 28

29 Example Misclassification Case: Atlantic Coast Masonry v. IRS U.S. Tax Court Company was a mason subcontractor Company contracted with others to supervise or be the foreman on the job Worker generally worked exclusively for company Compensation was base amount plus a percentage of profit, paid in cash Productivity determined compensation Worker hired (and fired) masons and laborers on a per-job basis and supervised them Laborers often went from project-to-project Company provided plans and supervised Worker on a daily basis Worker had authority to execute change orders Worker provided own tools Company paid everyone in cash on a piece rate basis 29

30 Example Misclassification Case (cont d) Degree of Control: Company set the laborers working hours at eight hours per day Worker was first determined to be an employee Laborers were also paid on a weekly basis, as opposed to at the end of the project An employer need not stand over the employee to control an employee Does the Company retain the right to control the results to be accomplished and the manner in which the work is to be performed Investment in Facilities: Company purchased all materials and leased all heavy equipment Right to Discharge: Company retained right to terminate laborers 30

31 Example Misclassification Case (cont d) Opportunity for Profit and Risk of Loss: Laborers could not share in the profit if the project came in under budget, nor could they suffer a loss if the project was over budget There is an acknowledgment that piece rate work tends to favor IC status Integral Part of Business: Without the laborers, the work could not get completed Permanency of the Relationship: Laborers were engaged for one job at a time, and then they could go elsewhere 31

32 Example Misclassification Case: Baker v. Flint Eng. & Constr. Co. 10 th Circuit Court of Appeals This case involves the workers filing suit against the construction company allegation violation of the FLSA s overtime provisions Workers did execute an Agreement with Independent Contractor Workers (welders) were supervised by the foreman of the GC The welders were paid at a fixed hourly rate with no opportunity for profit or risk of loss The welders enjoyed a permanent relationship with the general contractor for the duration of the job The welders did not make their own independent judgments on the job site The welders were economically dependent on the GC for the duration of the project Failure to maintain time records was costly to this employer 32

33 Example Misclassification Case: Awuah v. Coverall North America Mass. Supreme Court This case involved workers filing suit against the employer alleging misclassification Workers were bound to written independent contractor agreements Agreements included pay-if-paid clauses Pay-if-paid clauses are in violation of the wage payment statutes Workers argued they were employees and the wage law was violated Workers were required to complete mandatory training Workers had to wear approved uniforms and ID badges Employer performed all billing and collection services from customer Contracts did require workers to provide insurance naming the employer as additional insured Contracts did require workers to purchase replacement equipment 33

34 One for the Independent Contractor: Michael v. Pella Products Illinois Appellate Court President of corporation that contracted with window seller to provide installation services filed suit under Illinois misclassification law Written contract governed the parties relationship Services were performed through a corporation Corporation used its own employees Corporation received payment from seller for services provided by employees Corporation controlled hiring, firing, pay, and work schedules of employees Corporation worked for others 34

35 Example Misclassification Case One for the Independent Contractors Yet window seller provided its specifications Window seller required installer s employees to complete a training seminar provided by seller Installers were required to follow seller s installation protocols Seller also set safety standards Seller also performed quality control checks on installer s work Installers wore seller apparel and the seller logo was affixed to vehicles used by installer employees Seller provided some materials 35

36 Example Misclassification Case Another One for the Independent Contractors Case involved a commercial wall and ceiling contractor which engaged an IC carpenter Parties had a written contract Contractor did not provide any training to IC, but did conduct safety meetings IC supplied his own tools IC did not have a fixed working location Duration of work was intermittent, and IC worked for other companies IC maintained discretion as to when to work and how long to work IC was supervised by Contractor as if IC was an employee IC was paid by the hour, weekly, per invoice Form 1099 was issued by Contractor IC could have hired employees and paid employees Both parties believed it was an IC relationship 36

37 Control? Workers do not always come to work in the morning, and they did not always call to alert of an absence. Workers worked for varying periods of time, and no evidence shows the employer ever penalized workers for not showing up in the morning, or for leaving for periods of time... While the workers were on a job site, they were free to determine when to take breaks or when to eat lunch. For most of the day, the employer did not supervise workers' activities, and workers were able to follow their own pattern of work throughout the day. The employer had the right to instruct workers when, where, and how to work, and to some extent mandated the sequence of work. Workers were told when to work at certain job sites, they were showed where the jobs were located, and the employer flagged the jobs, left the workers to progress at the job, and returned for the final leveling. If workers left a job site in disarray, the employer instructed them to stay or return to clean it and often paid workers for that time. The employer assigned additional projects to workers when one job ended and another began... The employer could discharge a worker for not performing his work properly. 37

38 The Misclassification Issue Staying Out of Trouble 38

39 Considering Use of Contract Labor? Is the service provided an integral part of your business? How much are you relying on contract labor to meet your obligations? Avoid ICs working side-by-side with employees Is there an opportunity for profit or a risk of loss for the laborers? Who is providing the materials, tools and supplies? If the work is unacceptable, is payment still required? Is compensation negotiated? Who sets the price? How often are workers paid? Do the laborers provide their services to the public at large? Consider whether the labor only contractor advertises in the Yellow Pages 39

40 Considering Use of Contract Labor? Is there a non-compete agreement? Are you moving the labor only crew from job-to-job? Does the crew hold themselves out to the public as being your employee? Consider business cards, uniforms, logos on vehicles, signage Consider the level of control Do you retain the right to dictate how the work will be done? Is a certain schedule required? Are timesheets submitted? Must notice of absence be provided? Is it necessary to get your approval for the hiring of any helpers? Are you providing training? Use a written contract and include confirmation of IC status 40

41 Considering Use of Contract Labor? Who is responsible for supplying heavy or costly specialized equipment? Is the independent contractor responsible for paying costs affiliated with the location from where the work is controlled, such as its home office (this may be a van or truck)? Do your independent contractors have all required licenses and registrations? Does the independent contractor maintain his own set of books and records that reflect all income and expenses of the business? If you proceed with ICs, issue 1099s see the IRS safe harbor 41

42 The IRS Safe Harbor The Section 530 safe harbor eliminates all federal employment tax exposure (past and future) for qualifying IC arrangements To qualify: The taxpayer must have filed all Forms 1099 for the independent contractors Each group of workers that holds similar positions must be treated consistently The taxpayer must have a reasonable basis for its treatment of its workers as IC Reasonable basis includes reliance on federal court cases, published rulings, past IRS audit, industry custom Industry custom requires 10 years of practice and 25% of the industry 42

43 IRS Voluntary Classification Settlement Program 43

44 Requesting and Advisory Opinion You can file a request for an advisory opinion using IRS Form SS8 The agency will review the filing and then determine whether the specified individual is an independent contractor or an employee Once the IRS makes a ruling on your specific situation, you will have to operate in accordance with that ruling moving forward Federal compliance does not ensure compliance with state law 44

45 Form SS-8 45

46 Competing Against Contractors That Engage ICs? Sell the fact that your employees are covered by workers compensation insurance Sell the fact that you provide training to your employees, including job safety training Sell your hiring process, including review of work experience and verification of employment eligibility Note that you do not hire day laborers off the street Note that your business maintains a physical office Explain that because employees are used, you are able to provide full time supervision You can set your own quality standards You can schedule the work to ensure timely completion Bottom Line: You are able to maintain complete control over the job 46

47 In Closing.... Conduct a relationship audit If you are going to classify individuals as employees, know that you have options Different benefits for different job classifications 47

48 Presented by Philip J. Siegel, Esq. Hendrick, Phillips, Salzman & Flatt 230 Peachtree Street, N.W., Suite 2500 Atlanta, Georgia (404)