Posted by Ted Weyn on Tue, Mar 09, 2010 @ 04:37 PM
Information provided by the NECA.
Background
Beginning in the late 1960s and early 1970s, the IRS stepped up auditing compliance with employment tax laws out of concern that the Social Security trust funds were not being adequately replenished though the collection of Social Security taxes, The agency also perceived that many independent contractors were failing to pay their share of self-employment tax. The result of this policing was that many independent contractors were reclassified as employees.
However, an employer backlash ensued, and, ultimately, Section 530 of the Revenue Act of 1978 was enacted and incorporated into the Internal Revenue Code in response to complaints that the IRS was too aggressive with respect to worker classification issues. It was originally intended as a temporary measure but was made permanent by the Tax Equity and Fiscal Responsibility Act of 1982 under President Reagan.
Section 530 is a so-called “safe harbor” provision. It prevents the IRS from retroactively reclassifying “independent contractors” as employees and subjecting the principal to federal employment taxes, penalties and interest for such misclassification.
In order for an employer to qualify for section 530 relief, it must have:
(1) Consistently treated the workers (and similarly situated workers) as independent contractors;
(2) Complied with the Form 1099 reporting requirements with respect to the compensation paid the workers for the tax years at issue; and
(3) Had a reasonable basis for treating the workers as independent contractors.
Unfortunately, qualifications #1 and #3 are somewhat subjective in nature and hard to define. When conflicts arise with respect to these qualifiers, the issue is usually decided in favor of the taxpayer because of the “sense of congressional intent.” (That is, because Section 503 arose out of pro-taxpayer legislation.)
And, while the IRS has taken the position that the 1099s must be timely filed before Section 530 relief is available, this position has been rejected by the courts, finding no such requirement under the plain language of the statute.
Therefore, many employers use the Section 503 loophole to avoid paying FICA (Social Security and Medicare) and FUTA (unemployment) taxes on their workers, and to forgo the background-checking, record-keeping, and payroll-accounting burdens associated with genuine employees. Although the national extent of employee misclassification is unknown, earlier national studies and a few more recent ones suggest that it is a significant and growing problem.
The last time the IRS undertook a comprehensive analysis of worker misclassification was for tax year 1984. At that time, the IRS estimated that nationally about 15 percent of employers misclassified a total of 3.4 million employees as independent contractors, resulting in an estimated revenue loss of $1.6 billion (in 1984 dollars). More recently, the federal Government Accountability Office estimated that employee misclassification resulted in the underpayment of an estimated $2.72 billion in Social Security taxes, unemployment insurance taxes and income taxes in 2006, the latest year for which figures are available. And, there is anecdotal evidence that the problem is escalating in these tough economic times.
Legislative Remedy
Over the past 10 years or so, many bills to correct the Section 503 loophole have been introduced in Congress. (Even President Obama offered one in 2007 as a freshman senator from Illinois.) NECA has supported these efforts and, even though none of them reached a floor vote, we are enthusiastic about the prospects for the two related bills introduced in the current (111th) Congress.
Last July, Rep. James McDermott [D, WA-7] introduced HR 3408, the Taxpayer Responsibility, Accountability, and Consistency Act. It has 26 co-sponsors, all Democrats.
In December, Sen. John Kerry [D, MA] introduced a bill of the same name that is listed as S 2882. It currently has six co-sponsors from the Democratic party.
This legislation seeks to amend the Internal Revenue Code to:
(1) Require businesses to report to the IRS all payments of $600 or more made to corporate providers of property and services;
(2) Set forth criteria and rules relating to the treatment of workers as employees or independent contractors; and
(3) Increase penalties for failure to file correct tax return information or comply with other information reporting requirements.
In addition, the legislation would require the Secretary of the Treasury to issue an annual report on worker misclassification.
"This is about leveling the playing field and ensuring that America's workers receive the protections and pay they deserve," said Sen. Kerry. "We cannot continue to reward businesses that refuse to play by the rules."
Posted by Ted Weyn on Mon, Mar 08, 2010 @ 11:55 AM
As we have continued to discuss in ongoing Human Resource Management Issues, the ambiguity regarding laws and regulations in the use of Independent Contractors in both the US and Canada remains "foggy". However, there continues to be a push in the legislation to address this issue from both a Tax Compliance 
approach and through ongoing attempts in the clarification of the employement treatment for Independent Contractors.
But is the fog lifting?
- The Fed Ex driver issues which began as a $350MM tax penalty accessed by the IRS to the Memphis based shipping corporation, has now has wittled itself down to a fraction of that intial accessement.
- Canadian CRA and US IRS efforts to ramp up the investigations of misclassified employees is growing every day.
- Courts are ruling on situational occurances.
Last week, the Canadian Law firm of Gowlings Lafleur Henderson LLP's Ross Wells commented on the Ontairo Court of Appeal's decision...
"that an employer who has a long-term relationship with an independent contractor must grant him/her severance payments as he/she is considered an employee of the company: “It leaves no uncertainty of the entitlement of a dependent contractor to pay in lieu of reasonable notice,” Wells said. Furthermore, he finds the need for employers to have written contracts with dependent contractors. Wells represented Elizabeth McKee in the McKee v. Reid’s Heritage Homes Ltd. case.
For the full article, see “Bringing dependent contractors out of the shadows” in the March 1 issue of Law Times.
While this case brings specific case law decision by the Canadian Courts to light, the entire classification rules and laws surrounding these workers continues to remain in the mist and puts employers in a vulnerable position of which there is no clear "right or wrong" answer.
All an employer can do is take precautionary steps to mitigate risk.
Posted by Ted Weyn on Fri, Feb 19, 2010 @ 01:03 PM
Please weigh in on this one...it's a hot topic!!!
As many of you have been reading the PSC Blog Train has been addressing and warning that the US Government is "circling up the wagons" to attack corporations who misclassified employees to recover "lost tax".
Below we have recapped today's NY Times article that gives greater detail on the movement by the Obama Administration to crack down on Independent Contractor Payroll Tax avoidance. However, what troubles PSC is how the administration is going about this. We feel that clearly the rules of engagement of these workers has to be cleared up. The
IRS 20 Point Test lends itself to a lot of ambiguity and makes enforcement and compliance difficult. We would like to see the Administration first address the policy surrounding Independent Contractors/1099 in order to simplify the classifications with the tax laws. This would enable businesses who employ such resources the ability to comply and pay the appropriate tax. Compliance is a far less expensive way to get the tax revenue than law suits and penalties.
Here is a recap of the article that ran in today's The New York Times (Click the link for the complete article): - Federal and state officials, many facing record budget deficits, are starting to aggressively pursue companies that try to pass off regular employees as independent contractors.
- Federal estimates are that the crackdown will yield at least $7 billion
over 10 years.
- Companies that pass off employees as independent contractors avoid
paying Social Security, Medicare and unemployment insurance taxes for those workers.
- Companies do not withhold income taxes from contractors’ paychecks, and several studies have indicated that, on average, misclassified independent workers do not report 30% of their income.
- Misclassifying can mean a 20 or 30% cost difference per worker.
- A Harvard study found that 4.5 percent of Massachusetts workers were misclassified, while a Cornell study concluded that 10 percent of New York’s private-sector workers were.
These are some of the highlights of the article. I hope you will let us know how you feel and take advantage of our Risk/Reward Assessment to help determine if you might be subject to this type of decision.
Posted by Ted Weyn on Thu, Feb 18, 2010 @ 03:44 PM
Update taken from Money
Important information for our Canadian Contractors and Clients
Employment insurance premiums are likely to spike for both workers and employers in coming years, adding costs that could result in 200,000 job losses, a group representing small-to-medium sized businesses found.
The increases will be triggered as the government’s E.I. fund falls into deficit following a temporary freeze in premiums during the recession and because of higher unemployment, the Canadian Federation of Independent Business said.
The fund is likely to have a shortfall of $14.7 billion by the end of 2012, triggering an automatic 15-cent increase in premiums every year until a $2 billion surplus is restored in 2016, it said.
That will mean employees’ E.I. premiums will rise from $1.73 per $100 of maximum insurable income to $2.48 in 2015. For companies, contributions will jump from $2.42 on that basis to $3.47, it said.
The increases will probably add about 0.6% to payroll costs, leading to a reduction of 200,000 jobs in the short term and a 1.5% reduction in wages over the longer term, the business group said.
Once the situation improves the CFIB projects the fund will swing to a large surplus because under the Canadian Employment Insurance Financing Board’s rules rates will not come down fast enough.
The CFIB is urging changes to the mechanism to smooth out future swings from deficit to surplus and the resulting impact on business.
Let us know how this will effect your business. And, don't forget to take our Free Risk Reward Evaluation.
Posted by Ted Weyn on Tue, Feb 16, 2010 @ 03:34 PM
Great update from HRMorning.com
The Department of Labor is gearing up to enforce labor laws. Proof: The agency just asked for an additional $67 million in funding.
The funds were part of the budget it released earlier this month for fiscal year 2011.
Some noteworthy items in the DOL’s proposal:
- Part of the funds allocated for worker protection programs would allow the agency to hire 350 employees – 177 of which would be investigators and other enforcement staff.
- The Wage and Hour Division would receive $244 million in funding (up $20 million) and hire 90 new investigators and enforcement staff.
- The DOL also indicated it’ll crack down on employers that define workers as independent contractors.
- As part of a joint venture with the Department of the Treasury, the DOL budget includes $25 million to target employee misclassification and hire 100 additional enforcement personnel.
- The DOL has plans for a $50 million initiative to promote paid-leave experiments on the state level.
The budget request has ruffled the feathers of one congressman, John Kline (R-MN). He said the DOL’s plans would create an emphasis on punishment rather than compliance.
In addition, he claims the proposed budget will spark efforts designed to “demonize employers.”
Please share with us your concerns or stories... Also, take our Free Risk/Reward assessment. Don't be one of the Government statistics.
Posted by Ted Weyn on Sun, Feb 14, 2010 @ 09:07 PM
Employers' use of independent contractors instead of traditional employees has been on a steady incline over the past 20 years. Some employers feel that they can save money by using independent contractors instead of full-time employees. The contractors themselves may value the autonomy and economic perks that the status provides. Also, the specific skills and knowledge that independent contractors can bring to a short-term project can be critical and, therefore, worth a premium but not sustainable in the long term. But the use of independent contractors is not as perfect as these mutually beneficial points may seem.
A report prepared by the U.S. Government Accountability Office (GAO) in the Fall of 2009 concluded that employee misclassification is a “significant problem” with “adverse consequences” because it reduces tax revenues flowing to the government. In fact, the misclassification of employees as contractors is estimated to cost the Treasury Department over $7 billion in lost payroll tax revenue over the next ten years.
So the theory goes, since independent contractors are, by definition, self-employed, they are not considered “employees” and thus not covered by various tax withholding laws. Independent contractors also are not subject to most employment laws, so in addition to avoiding taxes, some employers may reclassify employees as independent contractors in order to avoid payment of overtime and benefits, and workers’ compensation liability.
And, thus, the crackdown on the misclassification of employees as independent contractors began. he U.S. Department of Labor (DOL) has made the proper classification of employees and independent contractors one of its "top priorities." The agency’s 2011 budget includes an additional $25 million for what it calls the “Misclassification Initiative” designed to target misclassification of independent contractors. Approximately 100 additional DOL enforcement personnel will be added to investigate employers.
The Internal Revenue Service (IRS) is in the middle of a similar misclassification crackdown. Beginning in February 2010, the IRS will commence intensive audits of randomly selected employers. One of the focal points of the audits is whether the employers are improperly misclassifying workers as independent contractors to save on taxes and employee benefits.
There’s also new federal legislation on the horizon. Congress is expected to take up legislation that will penalize employers for employee misclassification. One proposed piece of legislation, known as the Independent Contractor Proper Classification Act, was sponsored by President Obama when he was a member of the U.S. Senate.
States are getting into the enforcement act as well. New York and Massachusetts have created task forces to locate employees who are misclassified. Other states such as Maryland and Colorado have enacted new laws that impose harsh penalties on employers who misclassify employees as independent contractors.
Here in Delaware, the General Assembly passed its own law last year imposing stiff penalties on construction industry employers who improperly classify employees as independent contractors to save on business costs and avoid paying appropriate taxes. In addition to penalties of $1,000-$5,000 per misclassified employee, employers who fail to produce requested records can be issued a stop-work order by the Delaware Department of Labor and fined up to $500 per day for each day during which the requested records are not produced.
Compliance, though, presents its own difficulties. The tests used to determine whether someone is an independent contractor or an employee are fact intensive and differ among government agencies. In addition, each state may have its own unique test to determine a worker’s proper status.
Still, the penalties for non-compliance make this a treacherous area for the unwary employer. In addition to federal and state governments seeking unpaid payroll taxes and associated penalties, employment lawsuits in this area are becoming increasingly common. Claims from misclassified workers range from those seeking unpaid wages and overtime, to multi-million dollar class actions lawsuits. Misclassified employees have also successfully recovered retirement benefits, medical coverage for injuries they sustained on the company’s property, and rights to employee stock options and bonuses.
Given the increased attention to this area, the time to act is now. An internal review and audit of worker classifications should be a crucial component for any company that currently employs independent contractors
***********************
We trust you will weigh in on this important piece. Also, come and take our Risk/Reward Assessement.
Posted by Ted Weyn on Tue, Feb 09, 2010 @ 06:19 PM
Contractors who work at organizations for extended lengths of time can seemingly become the fabric of the organization. When someone walks your company's halls it is impossible to tell who is a full-time employee and who is a contractor. There in lies the problem. 
Many organizations lose sight of the proper Contractor-Employer relationship and put themselves at risk as it pertains to co-employment. Many of you are familiar with the Microsoft Case that exposed the company to millions of dollars in fees and fines due to what was perceived by the courts as a co-employment situation.
Here just a few rules to follow to help in mitigating co-employment risks.
- Set tenure thresholds that limit the time in which an individual can serve in one position as a contractor within your company.
- Do not invite the contractor to corporate events. i.e. Holiday Parties, Corporate Functions, etc. They are not an employee of the firm and therefore should not participate
- Do not formally review the contractor's work. This is a tough one, but try and run all directional input and statements through the contractor's company representative or in writing to the corporation they are provided to you through.
Try and remember the courts will review these relationships under a comparison filter. If it sounds like; looks like; feels like; a full-time employee/employer relationship, then it is.
Do you have any items your company conducts to mitigate co-employment risk? Please jump on the PSC Blog Train and share with us what you know.
These are just a few of the items you can do to protect your firm. If you want to learn more about the potential Risk/Rewards of Independent Contractors, please take our Free Risk/Reward assessment.
Posted by Ted Weyn on Mon, Feb 08, 2010 @ 04:37 PM
Today's blog post is especially important for those readers who take on Human Resource Solutions and/or Procurement Professionals that oversee Indirect Services.
There are 3 factors on the horizon that we see as creating a "Perfect Storm" in the world of workforce planning and optimization.
Recovering Economy - In the past 3 recessions (1982, 1991, and 2001) the use of contract/contingent labor surged post economic trouble. While unemployment hit a peak of 10.8% during the 1982 recession, the number of jobs in the contingent workforce grew by 577% between 1982 and 1998. According to the US Government Accountability Office, jobs in the overall economy increased by 41% during the same period.
In the aftermath of this recession we anticipate:
- Intensified growth in the contingent workforce over the next 10 years to two times the current average daily employed (6 million).
- Expansion of the current trend to broaden the skill segments used.
- Escalation in the "war for talent". Demand will be high and supply will be low of experienced knowledge workers.
Retiring Workforce - Recent Surveys of the "baby boomer" generation suggests that many intended to work during the typical retirement ages. The labor force participation rate of older workers (55+) actually began increase in the mid-1980's. By 2006 the group's participation in the labor force had risen significantly to 38.0%. It is anticipated that this strong upward trend will continue: in 2016, when baby-boomers will be between 52 and 70 years old, The Bureau of Labor Statistics projects that the labor force participation rate of older workers could reach 42.8%. This significant increase in retirement eligible workers will cause a significant decrease in the available experienced knowledge worker in the market.
Universal Healthcare - In spite of this initiative clearly stalled on Capital Hill, the U.S. must prepare for the fact that we may see a cost-effective, portable health insurance product available for the U.S. citizen. This coverage will enable the unemployed and those who elect to participate in the contingent workforce to maintain cost-effective, portable health insurance. Some studies show that 42% of U.S. workers remain in their current positions for the health insurance. If a viable public alternative was made available, we may see large numbers of full-time workers exit their jobs for contingent workforce flexibility while having a healthcare option.
I light of these 3 items we urge you to organize your Human Capital Management Programs and your Indirect Service Procurement practices so that they can easily scale to manage your organizations future requirements by providing visibility into your demand for productivity and use of Independent Contractors.
To read more about this. Request a complementary White Paper called Ahead of the Curve, The Steps you Need to take Now, authored by HCMWorks, Inc. This report will explore in greater detail the pending storm ahead.
Posted by Ted Weyn on Sat, Feb 06, 2010 @ 04:37 PM
As we close our our week on Independent Corporations/Contractors and insurance, we wanted to conclude with 3 main conclusions from this weeks articles. Also, we would like to thank those who have responded and participated. We had some great dialogs. Please keep contributing.
1 - All Corporations who employ the use of Independent Contractors should institute a rigorous insurance policy. Each Contractor should required to carry a minimum policy as dictated by the corporations Risk Management or Human Resources Departments.
2 - Individuals who have made the decision to work as and Independent Contractor should insure that they have researched the advantages and risks associated with this employment status. After which, they should take the necessary steps that protect them from tax and business exposure that could exist be being declared and Independent Corporation/Contractor.
3 - Independent Contractor's who are registered and are currently employed under this status, should be willing to make the necessary investments that insure they are legitimate from a business, tax and protection aspect.
Next week we are going to begin to explore the world of C0-employment Risks and the use of "Perma-Temps". We hope you will join us next week and jump on to the PSC Blog Train and share your insights.
Remember, if you want to have a Free Assessment to see whether your firm is at Risk or has Reward opportunities for savings in yoru current program, please click the link and answer the brief, 5 Question Survey.
Enjoy the rest of your weekend and we'll see you next week.
Posted by Ted Weyn on Thu, Feb 04, 2010 @ 05:05 PM
Does your company require background checks on employees prior to being allowed to begin employment?
Background checks such as criminal (CPIC), drug, credit and others are typical employment practices for full time employment in both the US and Canada. However, when your company brings in an Independent Contractor are the same checks being conducted?
Now, we are not referring to contractors brought into the organization via staffing agencies. Those staffing agencies should be conducting the necessary background checks that are consistent with your firms hiring practices and consistent with your contractual stipulations with the agency. However, we see many firms that employ Independent Contractors and allow them to arrive on their work premises with no background validation. At Risk?
Real Case Story
This is a real story. Now, after reading this you may say, "No Way!" But after over 20 years in the industry, there is not much I haven't seen or heard.
Pre-9/11, at a large financial services firm in New York City, two gentlemen arrived at Human Resources. When the Human Resources Manager was called the gentlemen identified themselves as FBI agents and inquired if a certain individual who's name they provided was working on-site? Upon checking the full time database and not finding the name, they checked the contractor database and the name showed up. Declining to provide reason, the two agent asked to be taken to the individuals works station where, upon arrival and opening the individuals briefcase, the agents discovered a loaded semi-automatic machine gun. The briefcase was closed and the agents with their suspect in cuffs, left the premises.
The end to this story was that Human Resources never heard another word on the individual nor from the FBI. The individual was working on the company's client database and was brought in by a hiring manager on a referral from a friend outside the company. Needless to say, policy change regarding Independent Contractors was changed that day.
While this case story may seem extreme and probably won't happen to you, be smart and insure you know who you are bringing into your organization and make sure the meet they meet the standards and requirements that you, your employee and company would expect.