One of the most common and controversial issues I encounter during Independent Contractor evaluations is the topic of expense reimbursement.  This subject ties into the idea of financial control, one of the three categories that are closely examined during an alleged  misclassification.

The Big Idea: Treat Independent Contractors Like Vendors

Smart businesses seek to keep their overhead low and costs down.  Many have therefore implemented expense reimbursement policies that employees must follow.  Often, we see agreements where this reimbursement policy is pushed to their independent contractors.  This should generally be avoided. Would you require vendors to follow a reimbursement policy?  Would you forbid your vendors from allowing their visiting employees to fly first class?  Would you require them to supply receipts to your company?

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Does this come as a surprise?

During his days as a senator, Barack Obama introduced legislation to congress targeting worker misclassification several years ago.  Other proposed legislation was introduced to congress, but seemed to die on the vine.  Since his election, many have kept a watchful eye on new bills from DC, anticipating activity focused on worker misclassification.

Momentum is Building… Are you prepared?

Upon review of the fiscal year 2011 budget , allocation of funds provide a clear indication of the federal government’s intention to take a closer look at this topic. The budget includes a proposal to combat the misclassification of employees as independent contractors by “eliminating incentives in law for employers to misclassify their employees” by modifying the safe harbor provision. Additionally the budget allocates $25 million towards the Department of Labor to target misclassification, calling for 100 additional enforcement personnel to address the issue.

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Low risk service types — do they exist?

In recent employment tax audits, cable installers, actors, ground-service delivery drivers, and even exotic dancers to name a few service provider types have raised a red flag with the ever so watchful IRS. So what specifically, about these service providers  rocked the IRS’s boat?   I am sorry to say that there is no definite answer, as many are the factors that will weigh in risk wise, when paying a service provider as an independent contractor. Besides,  judging by one of Massachusetts’ recent (and über strict) guidelines, one safe bet is to only engage contractors who perform services that are unrelated to your usual or core business functions.

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The truth about 1099 contractor use from an insider’s perspective:

On any given day, dozens of phone calls are fielded from businesses wanting to know the appropriate classification for their workers. In a time of economic hardship, many companies are turning to independent contractors to fill voids during an unforgiving budget crisis. These proposed ‘independent contractors’ will sometimes have a desk, name placard, computer, phone with client supplied voicemail, and many other employee like resources. A common thread among the hiring companies is the assumption that if the worker believes themselves to be an independent contractor then it must be true. The truth is that while the relationship may seem valid at the time of engagement the amount of control often begins to increase as the term of the relationship lengthens.

It has been a difficult fiscal year for many workers, independent contractors being no exception. For many small businesses, work is hard to come by, so when a good opportunity comes along for a long term contract many independent contractors are jumping on it. There is a chance that an alleged 1099 worker is actually hoping to gain full time regular employment, which would include employee benefits. In fact, a recent article published in New York Times indicates that labor data is showing a surge in the hiring of temp workers, extended hours for part time workers, and the use of freelancers. Freelancers are a great example of workers who are typically considered 1099 independent contractors, though not guaranteed this status in the eyes of the IRS.  The question becomes, is this individual acting as such?

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Let the crackdown begin!  As many of you have heard, and as Katya previously mentioned, the IRS is planning to step up enforcement efforts and employment audits around misclassified workers, and increase  penalties for such offenses.

Increased 1099 Awareness May Lead to Private Right of Action

Something to consider: More and more 1099 workers are hip to this crackdown and are reevaluating how they are being treated and classified by their ‘clients’. A case filed for $200 million against Northwestern Mutual Life Insurance Co. by a few of their independent contractors involves action on behalf of the workers.  They are claiming that they were misclassified and were being treated as employees without receiving minimum wage and overtime pay.  As this trend is spreading, and the word is getting around, my advice is to beware and revaluate the relationship you have with your independent contractors.  Here are a few Helpful Hints to help protect your business:

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Tax Audit Results in Misclassification Penalties

The IRS is calling on the city of Pine Bluff, AR, or rather auditing and assessing fines on the city’s 2007 payroll and contractor taxes.  There is currently a $63,803 price tag on the initial assessment which the city hopes to minimize.

City Contractor Use Not Safe From Federal Scrutiny

This audit is one of many being done at the city level by the IRS. Recent city audits of misclassified workers include Santa Fe, NM and Atlanta, GA who has taken steps to correct the issue.  It may be worth looking into the correct classification of their workers for many city governments; if not to prevent fines, to prevent bad press and potential headaches from union guilds.

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As most businesses are aware, the IRS is launching a massive employment taxes audit in 2009, and much has been discussed regarding whether or not these businesses are ready to successfully survive the audit and avoid substantial penalties.  Businesses are implementing proactive approaches on how to prepare for this type of audit, and are cautiously assessing what amount of risk they are willing and able to take on when working with independent contractors, especially considering that proper worker classification will be a highly scrutinized item included in the audits.

Businesses are being selected, and will be audited; this is a given. Consequently, this means businesses will more than likely be more selective and conservative with those small businesses and individuals they chose to contract out to. Furthermore, due to the current economic crisis, many businesses have placed a stop on spend when it comes to engaging vendors and independent contractors.

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FedEx prepare to do battle with yet another opponent in the war on worker misclassification.

On Tuesday the Attorneys general from New York, New Jersey and Montana issued a letter of warning to FedEx regarding its current independent contractor driver model.  If FedEx would not abandon its current independent contractor model for home delivery drivers they would be forced to bring suit against the shipping giant.

The letter contained harsh accusations like “blatantly misclassifying its drivers”; FedEx Ground has denied these individuals the employment rights guaranteed by law. Practices which would support the allegations of worker misclassification and cited by the AG’s; the work performed is a core competency of FedEx Ground, drivers integrated into business functions of the company, determines the hours drivers work, how they load and deliver packages, and limits the drivers ability to compete other employment. The inability to work for the competition clearly creates financial dependency on Fed-Ex similar to that of an employee.

More than 1,000 drivers would be impacted by the changes should FedEx cave in under the pressure from this powerhouse. FedEx must respond with a decision by October 27, 2009 a deadline that is fast approaching.  Should Fed-Ex disregard the letter the AG’s will have little choice but to file suit. The AG’s are confident they would win the suit based on its findings during the investigation of FedEx worker practices. According to the AG’s there is more than enough evidence of worker misclassification.

The suit is being called a “multistate effort” and this is not the first time this issue has come up with Fed-Ex. Earlier this year in June attorneys general from six other states wrote to FedEx Ground, demanding changes to the existing driver model. States are teaming up forming a task force in hopes of pressuring FedEx Ground to change its driver business model.

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Employee or Independent Contractor Classification Classes for Contractors!

No money to conduct random audits? Are furloughs wreaking havoc on your ability to deploy auditors?  One state finds a creative way to uncover a few employees and drum up payroll taxes simply by advertising free self-classification classes!

Iowa Workforce Development is advertising assistance with proper worker classification to contractors. Just think in one hour you too can become an expert in worker classification.  You will learn how to tell the difference between an employee and independent contractor and determine if you are properly classified!  The goal at the end of the class is to make you an expert and help the state reduce the number of misclassified workers in Iowa.  “Getting the classification correct is critical for tax, wage, unemployment, workers’ compensation and other employment issues. Getting it wrong can cost an employer$$”.

This offering is just another example of what lengths the states will go to demonstrate the renewed emphasis of enforcement by federal and state regulators. Misclassified workers step forward to be reclassified; employers are identified then fined resulting in a new flow of future payroll tax revenues. What a great way to get the cash flowing into the state and federal governments empty coffers!

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The threads of this cable story twist and turn in every direction. Tangled and knotted up so badly it’s difficult to locate the epicenter.

Larry the cable guy was hired by RCN as an independent installer where he happily worked for years.  Suddenly Larry loses his job, has no money and then decides to file for unemployment where he is turned down. Seems independent contractors are not eligible to collect unemployment benefits. Larry learns had he worked as a regular RCN employee he would be eligible to draw benefits and receive a weekly pay check. Larry gets an idea and a lawyer who claims Larry was misclassified as an independent contractor when he really should have been an employee.  Larry’s lawyer files suit against RCN on Larry’s behalf and oh by the way several other cable guys who also were misclassified as independent contractors. What started out as a story of one individual who lost his job and needed money quickly turns into a class action law suit thrusting a cable installation company into the hot seat. The cable guy story broke in June 2009.

It’s now fall and Larry is in the news once again this time suing Comcast Corporation for the same reason he sued RCN; employee misclassification.  Seems Larry had multiple clients err employers in 2009 with RCN and Comcast named as such. This suit is slightly different in that a third party has been added to a complex equation. Triwire Engineering a subcontractor for Comcast is also named accused of bank rolling the payroll for the cable giant. According to Larry he worked as a Comcast installer paid through Triwire from March until August then suddenly fired after TriWire allegedly learned of his suit against his previous employer RCN.  This latest lawsuit against Comcast and Tri-Wire is much bigger than a weekly paycheck. The duo is accused of violating the federal Fair Labor Standards Act and Massachusetts’ independent contractor and overtime laws.  Should Larry win it could mean a lifetime of paychecks!

With the economy still upside down employers must tread lightly when using independent contractors. Other unsuspecting employers accused of similar misdeeds by copycat contractors include cable giants Cox Communications and Charter along with a multitude of subcontracting entities.

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Did Schwarzenegger receive bad advice or just a simple misstep?

Californians have no choice but to sit back and watch as the financial strangle hold on the state continues to tighten. As unemployment numbers climb to an all time high of 12.2 percent, the economic downturn forces 2.2.million workers onto the unemployment line, continued ridicule of other states over the IOU’s to cover it’s debt I ask you could it get any worse?

The state known for its financial wealth and a state of plenty must endure yet another  financial hit laden with additional embarrassment.  Earlier this year Schwarzenegger rolled out a cost cutting plan in an effort to save the state some money ordering reduced hours at state offices and placing workers on unpaid time off.  The goal to save money may actually end up costing the state even more!

Superior Court Judge Charlotte Woolard ruled in a suit brought by the Service Employees International Union which represents the funds of more than 6,300 workers.  California’s insurance code State Fund exempts its workers from furloughs and hiring freezes. The union pointed out the furloughs qualified as a “staff cutback”.  Employees who were illegally furloughed are entitled to back pay plus interest for the days they missed work. The payout could cost the state a whopping $23.2 million.

The ruling couldn’t come at a worse time for California as it continues to struggle to close a $24 billion dollar deficit.  Sadly enough this fiasco may not end here. Officials fear other state workers who were also furloughed may come forward seeking compensation.

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FedEx Corporation may face $14 million in taxes and penalties plus interest over the misuse of independent contractors in its FedEx Home Delivery division in 2002. The fines and penalties are related to uncollected employment and withholding taxes for 2002.

FedEx plans to challenge the IRS finding from the audit however final resolution any time soon highly unlikely.

“We believe that we have strong defenses to the proposed assessment and will vigorously defend our position, as we continue to believe that all of FedEx Ground’s independent contractors, including those providing the FedEx Home Delivery service, are independent contractors,” FedEx said in the filing.

The IRS is also reviewing Fed-Ex for similar issues related to tax years 2004 - 2008.

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More than 6,000 employers hold a winning ticket and don’t even know it. Will you be one of the lucky ones?

Beginning in November 2009 the IRS will launch its latest National Research Program (NRP). This NRP will be focused on conducting employment tax audits.

Of the 6,000 employers unknowingly entered into the IRS lottery 2,000 of them will be declared winners in 2009.  The grand prize?  Fines, penalties and plenty of bad publicity. These unlucky employers up until the moment they are officially notified have no idea they have been entered into this audit sweepstakes.  They were randomly selected by the IRS and with any luck will come out of the audit only slightly bruised.

Basis for these audits?  The U.S. Treasury Department released a study on the U.S. “tax gap”; the difference between taxes owed and taxes not paid by tax cheats. Who are they? They are employers who underreport, underpay or simply never file. The Treasury estimates a tax gap of $345 billion and the IRS views the gap as justification for the audits.

What is your plan of action should your number be declared a winner?

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Mandatory taxation for independent contractors a cure for what ailes California? Employers required to withhold 3 percent of independent contractor wages to help balance state budget.

California officials are pushing for mandatory withholding of taxes from all wages paid to independent contractors. Governor Schwarzenegger failed to endorse the proposed budget last week due to an unrelated issue but nonetheless the money must start flowing in soon.

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Looks like Larry and the other cable guys aren’t going to take it any more.

Here we go again!  An unsuspecting company, RCN must now pay the ultimate price for hiring misclassified workers; triple the damages in Massachusetts for wage and hour cases. To boot RCN must live with the  bad publicity for years to come.

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