How Can You Avoid The Possible Fines and Penalties Associated With Workforce Misclassification?
I just read an article by Martha Neil regarding the 17 million dollars in OT, penalties and back wages ZipReality will need to pay as a result of a misclassification issue... That’s big and quite painful! The largest in California history of it's kind.
Corporations today know of the risks regarding misclassification, (if they don't they should!) but many feel that they're not a target and this sort of penalty won’t happen to them. That's not necessarily true. The perception that they are small and will be the last on the list to be placed under the microscope, audited and fined is also a misconception. Big or small, government needs and wants that money. Big companies get hit with huge fines and smaller corporations get hit with smaller penalties. Relatively speaking, the pain is the same.
How can your company avoid the misclassification risk and the associated penalties?
First a quick analysis of your present situation should occur:
- What % of my workforce is permanent, temporary, and contractual?
- When, why and how do I hire my temps?
- What is the average length of their assignment?
- When, why and how do I hire my contractors?
- Who is and how are we on boarding them, managing them, paying them?
- Are we aware of the latest regulations regarding the proper management and hiring of our temps and contractors?
- If we are at risk, how much would this cost the company?
- What are the benefits or risks of managing them internally versus using a professional expert vendor?
- What service lines are my temps and contractors in?
- Do we have the adequate insurance in place, do they?
- Are we classified properly with WSIB?
The second part of the process is a customized plan. The answers to these questions should give you a better idea of your current status to then take action with an effective plan to mitigate or even eliminate the misclassification risk. By the way, you may also find that you save your company a great deal of money in the process as your administration and workforce processing is streamlined.
Who can help? A PEO organization can definitely assist. Remember, even if you are considered a small or medium business the cost of non compliance will hurt you just as much as it hurts big corporations on a relative basis. If you're at all uncertain of where your company is on continuum of misclassification risk, reach out for help, it may be the best money you spend in HR this year.
We're here to help. If you have any questions or doubts, get them cleared up now and avoid the financial risks.
Independent Contractors Offer Specialized Services to Business...Is There a Risk Associated With the Length of Their Service?
Payment Services Corporation processes both employees and independent contractors. Close to 60% of our contractor base are independent today and we have been maintaining this number for the last 18 months. Clearly, during tough economic times, organizations will supplement peak business needs with the use of independent contractors. Specialized skills are also required during these economic times which also contribute to the high percentage of independents.
Supplementing peak business needs is what the use of independent contractors should be for and therefore used for a limited time period. Now if your business is thriving, that is fantastic news, and, an opportunity to go out and hire the permanent resources required to service your growing business. Many corporations today will have a tendency of extending their existing independent contractors beyond the limited time suggested. The ideal amount of time varies depending on the level of risk the contractor presents to the corporation. There is no set time provided by the CRA. If the independent contractor is misclassified then no time is a good time and it is a good idea to look into a PEO solution. If the independent meets 90% of the criteria of being a true independent then you can probably go beyond the 1 year never surpassing the 2 year mark. If the independent meets 50% of the criteria then you want to make sure he is filling a very short term contractual need way below the 1 year mark. Again, a misclassified independent contractor presents a great risk! Another risk is the lack of proper tenure management. How is Contractor Tenure Real Risk?
- With an independent contractor the corporation can avoid the payroll, withholding and reporting responsibilities, that they would normally pay for an employee, as well as benefits expenses, the employer portion of the Canada Pension Plan (CPP) and Employment Insurance (EI) remittances, and potential liability related to Worker’s Compensation Board issues. If audited the corporation would be at risk to pay back the government due to misclassification issues. The longer the independent has been there the higher the costs.
- The corporation doesn’t have to worry about including the independent contractor in their benefits program, vacation program and any other available perks made available to the permanent employee. If audited the corporation would be at risk to pay back the government due to co-employment issues. The longer the independent has been there the higher the costs.
- Along with the co-employment risk there can be integration issues. The fees involved are often to pay the government but in this case the corporation can also be asked to hire the independent as a permanent employee, integrating them into a role that meets or exceeds their present position and be asked to meet the obligations that another permanent employee has acquired with the same tenure.
In summary, the corporation should make use of the great skills independent contractors bring to the table for a limited time period. When business grows and a consistent business need exists then a decision to hire that contractor as a permanent employee or go out and recruit for a permanent employee is wise.
Is this a potential issue within your company? Are you aware of what risks you may be exposed to? What about the penalties and fines associated with workforce misclassification? We'd love to help, contact us today if you have any doubts or questions.
Each year Payment Services Corporation surveys their contractor community to determine the level of satisfaction they are receiving with their delivered services. The data is compiled to assist in the 
design of programs that will address areas for improvement in overall operations and contractor processing. This year's survey brought many positive facts about PSC's user community to light.
Some of the interesting statistics complied were:
- 70% increase in survey participants over prior year's results
- All key areas of service saw an incremental improvement over prior year's results
- Over 90%+ of respondants were either "Extremely Satisfied or Satisfied" with the overall services provided by PSC
- Biggest area of attention was Expense Processing. However, all related points demonstrated an improvement over previous year's results.
"Needless to say, we are very proud of this years results", commented Maria Ricci, Payment Services Corporation's General Manager. "We have a dedicated team of service professionals who work diligently to ensure that both client and contractors receive unparalelled service."
In 2011 PSC will continue to implement processes and programs that keep consistent with our "Kaizen" approach of continous improvement and look to achieve improved results for another consecutive year's in 2012.
Read Article by Tavia Grant
With temporary workers, flexibility’s the name of the game
Great insight article from the Globe and Mail extolling the value contingent labor can bring to any corporation. Temporary labor continues to grow in its use from both large and small companies throughout Canada and globally. However, as any company begins to use temporary labor for the first time or strategically expand its usage footprint, there are many “buyer beware moments”.
Contingent labor management can quickly become like “herding cats”. Without proper management and program processes in place the program can rapidly become out of control in 3 key areas:
- Costs
- Compliance
- Control
CRA continues to ramp up its inspection of Independent Contractors (ICs) that might be employees misclassified according to CRA. That can put the company at a potential tax risk with CRA if they determine that the IC is not an IC, but in fact your company’s employee. Also, there are potential risks with the extended usage of temporary personnel in large numbers or ICs in regards to co-employment legal exposure.
Conclusion: Temporary labor is a great asset to any organization in terms of giving them the flexibilities to manage their productivity in a cost effective way. Just stay apprised of the risks and manage accordingly, “An ounce of prevention is worth a pound of cure”.
In a recent blog convesation I had with Shaun Reid,Principal at Reid Kelly, P.C. Law Firm in the NYC area, we were dicussing some
of the preventitive measures companies can take to protect and determine if a contractor is "legit" or not. Shaun provided a sussinct and easy to follow guideline for engaging 1099s or Independent Contractors for your business.
Here's what Shaun Had to share:
Ted. I have been tracking this issue within the topic of worker misclassification more broadly. The economy is pushing both employers to rely more heavily on independent contractors, and broke governments to increase enforcement to raise revenue. This, in addition to employer incorrect use of interns, and incorrect designation of employees as exempt from overtime, all add to potential employer liability. I write about it here: http://www.reidkellypc.com/blog/potential-shut-downs-for-start-ups-employee-misclassification-minefields/
Here in New York, several government agencies have their own tests for determining whether a worker is an employee or an independent contractor. The dominant theme in each test is the degree of control the hiring person/entity exerts over the manner in which the work is performed. As such, the two points I typically make are:
(1) make sure that the worker has all the indicia of a bona fide independent business (i.e., tax Id number, business cards, stationary, insurance, their own tools/equipment, they advertise their business and services in print and/or electronic media, they are free to accept or reject other work, they assume the risk of profit or loss in provision of services, etc.), and;
(2) Have an experienced labor & employment attorney write a contract specifying that the relationship is that of independent contractor, within which you should:
a). define the scope of services,
b). list the fee to be paid (flat amounts are better than anything that looks like a weekly/bi-weekly wage),
c). indicate that they pay their own expenses (including supplies, insurance, workers comp, etc.)
d). indicate that they may hire additional help if they wish (at no extra cost to you or at an increased contract cost to be renegotiated with you),
e). make clear that they are free to determine the order of work and which of their workers to use on any given aspect of the project, etc.
There are other things that can be done to evidence independent contractor status. However, the main point being that the you want to show that the hiring party exerts the least amount of control possible in how the desired result is obtained, and that the hired party is in business for themselves, freely deciding how to accomplish the goals of the project, with all of the potential for profit and loss typically experienced by legitimate independent businesses.
PSC always encourages our readers to verify all our content with thier own legal resources. The information we provide here is for directional purposes only.
Contractor Misclassification Continues to be Seen as a Revenue Source For Governments
Over the past 24 months we have continued to publish articles about the risks associated with Independent Contractors. Additionally, we have reported on the increased efforts from the IRS Agents cracking down on industries and employers who are “misclassifying workers”. In last month’s CWS30 publication by Staffing Industry Analysts, they assembled a great article that brings all readers up to date in what’s going on within the area of independent contractors and most importantly what some of the preventative measures you can take to protect your organization. Some of the more interesting points in the article are:
- According to Staffing Industry Analysts, the publisher of this newsletter, less than 20 percent of companies believe that their ICs are all classified properly.
- SIA estimates also showed that companies spent roughly $250 billion on independent contractors during 2009.
- "The magic is coming up with a user-friendly process that people are going to follow," says Eric Rumbaugh, partner with Michael Best and Friedrich, a Wisconsin-based law firm. There's no point having a process that works only on paper. Thanks to hiring freezes, hiring managers are forced to come up with ways to get the job done.
- A disgruntled worker may tip off regulators and trigger an audit. Or, perhaps a worker files an unemployment claim after wrapping up a project. That, too, could immediately set off an audit.
- While some companies do have the necessary expertise in-house to classify candidates as contractors or employees, Reed Elsevier, a professional information solutions provider, has outsourced this function.
- Johnson & Johnson uses its MSP to classify contractors
In summary SIA provides the following list of items you should be aware of. We however, encourage all of our clients that without the proper internal resources, do not overestimate the compliance risk required here and consider outsourcing.
At the end of the day, it shouldn't take an independent contractor more than an hour to assemble all documentation needed to shield an organization from liability, experts claim. Your or your provider should supply them a list that a contractor can check off. This list may include:
- Appropriate contract with client in place
- The IC has a valid tax ID number
- Proof ICs are filing their taxes
- Proof the ICs are drawing fair salaries for themselves
- Insurance certificate, licenses, marketing materials
- Other types of insurance (e.g. automobile coverage, general liability) if required
- Proof of workers' compensation coverage
- Different clients
- IC has own offices, equipment
Feature: Get It Right
CWS 30 March 3.6
How companies can use contractors effectively and reduce their risk |
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Every few weeks, independent contractor (IC) compliance issues rear their head in the news. Sometimes the headlines are related to lawsuits, other times introduction of new legislation. Occasionally, they come in the form of warnings issued by the states or the federal government. This is not surprising given the times in which we live. The weak economy has increased the pressure on states and the Internal Revenue Service to obtain revenue, and they've identified companies that misclassify their workers as contractors as a potential source of income. Read the full article here...
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Reactive or Proactive…Wisconsin’s and Connecticut taking both sides of the spectrum with Independent Contractors
In the recent article from Staffing Industry Analysts, both Wisconsin and Connecticut have weighed in on the misclassification issue surrounding Independent Contractors. As you will see in the piece from Wisconsin, I feel that The Wisconsin Labor and Industry Review Commission (LIRC) is creatively interpreting the, already blurry laws, surrounding contractor classification to meet their needs of increased revenue generation. To state that “The court found that payment per-drop was more akin to payment on a piecework basis than payment on a per-job basis.” is purely semantics and a convenient interpretation of the laws to meet their needs.
Connecticut who’s General Assembly introduced a bill in January that seeks to clarify the definition of independent contractor in the state. The bill, S.B. 678, would change the definition of independent contractor to specifically "exclude any individual that is paid hourly, whose tools are provided by the person paying the worker, or who otherwise acts at the specific direction of the payor."
Why don’t states like Wisconsin take a proactive approach like Connecticut and make it more clear on how employers can grow the workforce without having to look over their shoulders to the reactive legislation that is waiting to pounce on them?
We see this as another clear sign that outsourcing the use of independent contractors is not only a good business practice, but quickly becoming a necessary risk mitigation practice. Not outsourcing is a kin to not having business insurance. It’s great, as long as nothing happens.
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Independent contractor classification remains a priority for companies and legislators alike. Companies are facing increasing scrutiny from government auditors, while state legislators are looking for ways to tighten up legal definitions pertaining to IC classification.
Read the full article here...
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PEO Services Can be a Positive Change for Your Company
The only significant reason to make a change is when you know that it brings substantial benefits to your corporation. Cost savings is top of mind for many companies today although we all understand that savings alone, doesn’t always make the cut. A considerable amount of benefits along with an abundant amount of savings is the real deal. Below, you will find the top ten benefits you will find when dealing with a PEO that will inevitably result in cost savings for your corporation down the road.
How Does a PEO Service Save Your Company Money?
- Reduced Legal Expenses- You do not have to pay an external legal firm to establish the appropriate contractor service agreements to be signed by your contractors, if agreements don't already exist. If they are, you need to ensure that the most current and protective agreements are in place to protect all parties involved. A PEO service provides this as part of their core business offering.
- Reduced HR Management- Your HR associates can focus on recruiting and on boarding your new permanent employees instead of investing in the processing of your contractor population. This will allow them to focus on the programs in place to help reduce and maintain a low turnover rate for your company workforce.
- Reduced Accounts Payable Management- Your AP department does not need to spend the time associated with the opening of vendor files, manipulating incoming invoices, ensuring payments and answering all the affiliated questions from your company's contractor workforce population.
- Reduced Workforce Misclassification Exposure- A PEO’s specialty of processing your contractor population and accurately classifying them will help reduce the risk of your corporation having to pay extraordinary fines if and when you are audited, and if your contingent workforce has been misclassified.
- Reduced Co-employment Risk Expense- A PEO serves as the employer of record, creating a necessary barrier between the contractor and your firm. This takes some of the risk out of the engagement of independent and employee contractors resulting in potentially serious co-employment risk and the related fines and penalties.
- Reduced Spend Management Expenses- A PEO can assist with rate management and spend control with the right technology in place. This will provide you with the essential reports you will need, in order for you to have a complete view of the number of contractors in place, the average rate of pay, tenure management etc. to save your company time and money.
- Reduced Contractor Availability and Competitive Risk Costs- A true PEO is not a staffing company; therefore, there is no risk of your valuable contractors not being available, or worse, being placed on a competitor’s site at the end of their contract.
- Reduced Finance Department Expenses- A PEO will offer you a consolidated invoice. With one detailed electronic invoice you will have a complete view of your contingent workforce spend.
- Reduced Timekeeping Expenses- A PEO will have an electronic timekeeping, expense processing and request management tool available to you via a web based system that you and your independent contractors can access from any browser with an internet connection, if you do not already have a system in place. This benefit will save you an incredible amount if you do not have one already in place. If you do, the PEO will adopt what you have and make it work to your advantage.
- Reduced Contingent Workforce Management Expenses- The PEO is there to answer all of the contractor’s questions, provide them with all the information they need to facilitate their accounting and manage them, their expectations etc…
There are those who feel that these benefits and savings are really only appropriate for large companies with many independent contractors. The reality is that these benefits apply to many companies with smaller numbers of contractors. Regardless of the size of your company's contingent workforce, there may be substantial savings opportunities and certainly reduced risks associated with contractor misclassification or co-employment. We're ready to help you today so reach out to PSC today and let's discuss how we can make these benefits work for you and help your corporation save time and money!
Payment Services Corp. would like to help, contact us today to discuss exactly how we can save you money!
New Rules for Temporary Employees in Ontario
A Professional Employer Organization is not and should not be considered a temporary help agency; even though there are many Professional Employer Organizations that are part of a bigger picture within many standard staffing firms. A company requiring pay rolling services for their pre identified employees have a tendency to turn toward the staffing firm presently assisting them with recruiting for this service, and often, due to that demand, staffing firms decide to open PEO divisions. This is quite a common practice. Where it gets to be a more complex matter and can result in legal conflict in this scenario, is that the rules mentioned in our blog: New Rules for Temporary Employees in Ontario, can be applicable to both the standard staffing agency and the PEO within, as both divisions/companies are one and the same.
If the PEO is uniquely a PEO then most of those laws mentioned aren’t even applicable to them and so there is no conflict. Let’s bring some clarity and show you how the PEO can make a difference:
1. Finder’s Fee Restrictions: There are no finder’s fees when an employee is managed and paid through a PEO because the PEO did not recruit that employee and does not provide any recruiting services.
2. Prohibition against charging fees to temporary employees: Fees are never charged to the employee as the PEO comes into contact with the employee only when the company refers the employee to the PEO.
3. Information regarding assignment: The PEO will prepare an agreement between the employee and the PEO reflecting precisely the information provided by the company. The PEO becomes the employer of record and therefore a Human Resources Manual is handed to the employee to help guide them on who their employer is, how the employer (PEO) can assist them with different issues and so on…
4. Temporary Layoffs: Upon end of contract, even if for a short period of time, an off boarding process is performed: record of employment is issued to the employee, applicable severance is paid out to the employee, closure to the employee file is immediate and therefore the employee is free to apply and work for any company of their choice, even the company that they were working at through the PEO.
5. Termination and Severance Obligations: Severance obligations are clearly outlined in the Human Resources Manual and discussed with the Employee. As mentioned in item #4, immediate action is taken so that the employee is not penalized.
As we’ve outlined in previous posts, PEO’s provide companies with a streamlined solution that ensures all best practices are followed in regard to contingent workforce management, saving the company time and money, and ensuring the exposure to worker misclassification or co-employment penalties are minimized or eliminated. Working with a temporary help agency’s in-house PEO service may not provide the same level of legal protection and security for your company. These are only some ways that a PEO can make a difference. Get your questions answered; make certain your company isn’t at risk because it can be expensive if you are found to be non-compliant in these matters, the financial penalties imposed are steep. Find out more, it's worth it!
A Professional Employer Organization (PEO) can definitely be a part of your Human Resources strategy when establishing a management plan, particularly in today’s economic environment. As we continue to emerge from the economic downturn of 2008, all companies are looking for ways that they can be more efficient at managing their workforce and making certain that they are compliant with regulations in order to avoid the risks and penalties associated with worker misclassification which can be very expensive. In order to avoid such risks more and more companies are turning to PEO’s who can be the solution to the following questions:
- Do I want to outsource my payroll? This PEO service eliminates the time it takes to open new supplier files, service contractors by answering their multiple questions that come with invoicing, tax filing etc...
- Do I want to have a better control of the number of independent contractors (1099) and T4 (W2) employees I have? Are they properly classified? Are we compliant with the law?
- Do I want to have a better idea of my average pay rate to better manage my costs and the duration of contracts? A thorough understanding of these metrics significantly reduces or eliminates co employment risks and the associated issues;
- Do I want to reduce the overall administrative workload associated with a short term non permanent workforce? The outsourcing of this work means that a company can focus on the retention and efficiency of the permanent workforce;
- Do I want to invest time and money to purchase a centralized management system to manage my temporary workforce? While this may be a solution for some companies, for many others it means the addition or expansion of the HR department.
At Payment Services Corporation we know that these kinds of questions have been asked during a Human Resources Management planning session, if not they should be as part of a prudent planning process. A Professional Employer Organization will work with your HR, Legal and Procurement departments to establish a customized service solution depending on your needs so your focus can remain on your core employees and business objectives.
Want some help with these issues? We’re here for you!