Independent Contractor Issues

Employer Misclassification Prevention Act intended to amend FLSA to impose additional compliance and record-keeping requirements on employers was introduced April 22. Employers must provide written notice of classification to each individual hired alerting employee/contractor of his/her particular status Keep records for each contractor hired Similar to work and wage records kept for employees.

1 Independent Contractor Issues Tony Puckett Dudley Hyde Alison McCalla Patel Corporation 1

2 What is the Impact of Worker Classification? Employment and income tax treatment FICA/Medicare v. SECA W-2 v Withholding requirements Application of federal and state laws Employment laws do not typically protect independent contractors Difference in workers compensation and unemployment requirements Various benefit plan issues Corporation 2

3 Advantages Associated with Independent Contractors Savings on taxes for payroll and unemployment No workers compensation coverage Employment laws generally do not apply to independent contractors Savings on employee benefits Ease of terminating the relationship Corporation 3

4 Government Oversight and Enforcement Federal and state lawmakers and government agencies are taking actions to increase oversight of and enforcement against perceived abuses in worker classifications by employers. Such actions include: Additional $25 million in DOL 2011 budget to target the misclassification of workers as independent contractors Additional 100 enforcement personnel Competitive grants to help states address problem IRS announces it will conduct thousands of random audits in the next three years to identify worker misclassification Corporation 4

5 Worker Classification Oversight and Enforcement Actions continued Federal legislation Employee Misclassification Prevention Act intended to amend FLSA to impose additional compliance and record-keeping requirements on employers was introduced April 22. Employer requirements under the Act include: Provide written notice of classification to each individual hired alerting employee/contractor of his/her particular status Keep records for each contractor hired Similar to work and wage records kept for employees Notify current and future workers of their classification Current workers: within six months of bill s effective date Future workers at time of hire Corporation 5

6 Worker Classification Oversight and Enforcement Actions continued Bill introduced in Oklahoma s Legislature which provides the following: Oklahoma Tax Commission, Oklahoma Workers Compensation Court and the Oklahoma Employment Security Commission would create a database of employers, employees and independent contractors that can be accessed by all agencies Such agencies are allowed to share information and coordinate investigation and enforcement efforts to detect employers misclassifying workers Corporation 6

7 Potential Consequences of Misclassification The following liabilities (plus interest and penalties for non-compliance) may be sought by government agencies or through litigation: Liability for many years of unpaid federal, state, and local income tax withholdings and Social Security and Medicare contributions Liability for unpaid workers compensation and unemployment insurance premiums Liability for unpaid work-related expenses and overtime compensation Liability for not providing health, pension and other employee benefits Corporation 7

8 Additional Consequences Proposed Under EMPA Failure to comply with the notice and recordkeeping requirements imposed by EMPA may result in: Workers being presumed to be employees unless employer shows clear and convincing contrary evidence Civil penalties up to $5,000 per violation for noncompliance with notice and recordkeeping requirements and misclassifying employees Willful violations subject to triple damages Corporation 8

9 Lessons from Litigation Clincy v. Galardi South Enterprises (2009) Adult entertainment nightclub ordered to reinstate a group of entertainers that it fired after the workers sued the nightclub Entertainers sued under the Fair Labor Standards Act (FLSA) alleging Denial of minimum wage and overtime because of improper independent contractor classification Court ordered employer to reinstate them, pending the outcome of the suit Lesson: Similar actions by employees disputing their classification are on the rise and employers should consider this risk in addition to government enforcement Corporation 9

10 Lessons from Litigation Halpert v. Manhattan Apts., Inc. (2009) An independent contractor acting for the employer told a job applicant that he was too old for the job. Court held that Age Discrimination in Employment Act s prohibition on age discrimination applies regardless of whether the employer used its employees or an independent contractor in the hiring process. Lesson: Even if an individual is properly classified as an independent contractor, such worker s actions can subject the employer to liability Corporation 10

11 Lessons from Litigation Vizcaino v. Microsoft Corporation (1996) A class of freelancers who worked for Microsoft, sued for participation in the various Microsoft benefit plans (including its stock option plan) during their tenure as freelancers, after being reclassified by the IRS as employees Employees received a settlement that cost Microsoft $96.9 million. Microsoft has placed a sharp focus on the question of whether freelance and temporary employees are entitled to participate in an employer's benefit plans, and if so, under what circumstances Lesson: An independent contractor program can result in unexpected and very substantial liability no matter how unintended, when workers classified as independent contractors are recharacterized by the courts or regulatory agencies as employees Corporation 11

12 Determining the Proper Classification IRS Regulations provide that an employer-employee relationship exists when the business for which the services are performed has the right to direct and control the worker who performs the services This control refers not only to what work is done but also how it is done It is not necessary that the business actually direct or control the manner in which the services are performed; it is sufficient if the business has the right to do so Corporation 12

13 Determining the Proper Classification Facts that provide evidence of the degree of control and independence fall into three categories: Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? Financial: Are the business aspects of the worker s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? Corporation 13

14 Determining the Proper Classification The IRS published a twenty factor list in Revenue Ruling that identifies twenty factors used in court decisions to determine worker status These twenty common law factors are not the only ones that may be important. Every piece of information that helps determine the extent to which the business retains the right to control the worker is important. The relative importance and weight of the twenty common law factors can vary significantly Information important in helping determine worker status changes over time as business relationships change. As a result, some of the factors are no longer as relevant as they once were. Corporation 14

15 Determining the Proper Classification Twenty Factors 1. Instruction 2. Training 3. Integration into business operations 4. Services rendered personally 5. Hiring, supervising and paying assistants 6. Continuing relationship 7. Set hours of work 8. Full-time requirement 9. Work performed on employer s premises 10. Order or sequence of work set 11. Oral or written reports 12. Payment by hour, week or month 13. Payment of business and/or travel expense 14. Furnishing of tools and materials 15. Significant investment 16. Realization of profit or loss 17. Working for more than one firm at a time 18. Making service available for the general public 19. Right to discharge 20. Right to terminate Corporation 15

16 Avoiding Liability for Misclassification Conduct an internal audit of your current payroll practices, focusing on the classification of various employee groups and employment tax returns Review all of your employee benefit programs and plans to determine how they address independent contractors and contingent workers who may be reclassified as employees Seek clarification from the IRS using its Form SS-8 Claim Section 530 Relief Corporation 16

17 Claiming Section 530 Relief Section 530 is a safe harbor that prevents the IRS from retroactively reclassifying independent contractors as employees and subjecting the principal to federal employment taxes, penalties and interest for such misclassification To obtain relief, an employer must have: 1. Consistently treated the workers (and similarly situated workers) as independent contractors 2. Complied with Form 1099 reporting requirements 3. Had a reasonable basis for treating workers as independent contractors Corporation 17

18 Claiming Section 530 Relief Section 530 does not make or validate workers as independent contractors; it only reclassifies them as non-employees for federal employment tax purposes Consistent attempts to reduce the relief under Section 530 have been made by legislators in recent years Corporation 18

19 Helpful Links - Form SS IRS Publication - Do you qualify for Section 530 Relief? - IRS Internal Training Employee v. Independent Contractor Corporation 19

20 Questions? Corporation 20