PSC Blog Train

FedEx pays more than $3MM for misclassified workers

CONTRACTOR ENGAGEMENT CHECKLIST

by Maria Ricci

There are quite a few steps that should be considered before providing a contractor with an engagement contract and sealing the deal. Whether you are hiring for a couple of hours or several months the impact of a poorly executed engagement can result in misfortune later!

Get Ready, Set and Go!:

• A Statement of Work (SOW) is provided to the engagement officer (hiring manager) with the following details: name of the contractor, contact information, rate, start date and end date of the engagement.
• Have both an Independent Contractor Agreement and an Employment Agreement available and insure that both have been carefully established and approved by your legal counsel based on the classification the worker is electing to engage with.
• Communicate with the Contractor. Review the statement of work and establish whether they will be processed as an Independent Contractor or Employee.  The on boarding package you will provide to the contractor and the checklist you need to use is different depending on the workers classification status.

Below are examples of items you need to include on a checklist. Items may vary based on federal, state/provincial tax and labor laws.

 

EMPLOYEE (T4/W2) CHECKLIST	INDEPENDENT CONTRACTOR CHECKLIST
Statement of Work (SOW)	Statement of Work (SOW)
Employment Agreement w/ resume	Contract Agreement
Federal, State/Provincial Tax Forms	Articles of Incorporation
Corporate Employee Handbook	Proof of Insurances
Copy of Policies and Procedures	Copy of Policies and Procedures
Payroll Forms/Direct Deposit	Payment Forms, EFT
Background Check Authorization	Proof of Background Check Completion
Expense Reimbursement Forms	Expense Reimbursement Forms
Time Sheet/Entry Instructions	Invoicing Procedures
ETC...	ETC...

 

 

 

 

 

 

 

 

 

 

 

 

 

As you can see there are quite a few things to consider. Building the process, actualizing the agreements, validation, distribution and collection of the forms, ongoing compliance, etc…  You also need to factor in the cost and time you will need to invest before you even get to the, "Get Ready, Set and Go stage!"

Once you see what's behind compliance, outsourcing may be a great option.  :)

Let PSC know how we can help...

Case in Point - Why the IRS is so interested in Misclassified Workers

As we have been reporting over the past month on the heightened interest in the Tax Authorities' pursuit of misclassified workers, here is a recent ruling from Massachusetts last week on why the IRS feels that there is an opportunity to generate revenue in this arena.

 

BOSTON, MA-Two former owners of a temporary employment agency in Stoughton were charged today with paying more than $24 million dollars in unreported cash to employees of their temporary employment agency as part of a conspiracy to avoid paying more than $7 million dollars in taxes, and hundreds of thousands dollars in workers compensation insurance premiums.

(Media-Newswire.com) - BOSTON, MA—Two former owners of a temporary employment agency in Stoughton were charged today with paying more than $24 million dollars in unreported cash to employees of their temporary employment agency as part of a conspiracy to avoid paying more than $7 million dollars in taxes, and hundreds of thousands dollars in workers compensation insurance premiums.

United States Attorney Carmen M. Ortiz; Susan Dukes, Special Agent in Charge of the Internal Revenue Service, Criminal Division – Boston Field Office; Warren T. Bamford, Special Agent in Charge of the Federal Bureau of Investigation – Boston Field Office; and Anthony DiPaolo, Chief of Investigations for the Insurance Fraud Bureau of Massachusetts, announced today that MICHAEL POWERS, age 45, of Wesport, and JOHN MAHAN, age 46, of Stoughton, were charged with one count of conspiracy to defraud the Internal Revenue Service ( IRS ) and their workers compensation insurers, one count of mail fraud, and two counts of false tax returns, all arising out of their operation of a temporary employment agency.

According to the Indictment, between 2000 and 2004, POWERS and MAHAN owned and operated Commonwealth Temporary Services, Inc. It is alleged that in order to avoid paying employment taxes, such as Social Security and Medicare, and to fraudulently reduce the businesses’ insurance premiums, POWERS and MAHAN arranged to pay more than $24 million of their payroll in cash, under the table.

Commonwealth Temporary Services, Inc. supplied hundreds of temporary laborers to businesses throughout Eastern Massachusetts. The amount an employer pays in payroll taxes ( FICA ) and workers compensation insurance premiums is largely dependent on the size of their payroll. POWERS and MAHAN allegedly lied to both the IRS and their insurers about the size of their payroll, and paid the majority of their employees in cash to make their fraud more difficult to detect.

If convicted, POWERS and MAHAN each face a maximum of five years in prison, three years of supervised release, and a $250,000 fine on the conspiracy charge; 20 years in prison, three years of supervised release, and a $250,000 fine on the mail fraud charge; and three years in prison, one year of supervised release, and a $250,000 fine on the tax fraud charges.

This case was investigated by the Internal Revenue Service, Criminal Investigation – Boston Field Office and the Federal Bureau of Investigation – Boston Field Office, with assistance from the Insurance Fraud Bureau of Massachusetts. It is being prosecuted by Assistant U.S. Attorney Sarah E. Walters of Ortiz’s Economic Crimes Unit.

The details contained in the indictment are allegations. The defendants are presumed to be innocent unless and until proven guilty beyond a reasonable doubt in a court of law.

 

Contractors before Contracts, Oooops!

In the PSC Train Blog this week we have been discussing "prevention" steps for Independent Contractor risks.  Today we are going to address a seemingly innocent operational convenience that can have deep legal and cost consequences.

We encounter many times when organizations find out, after the fact, that a independent contractor is working on premise without the proper corporate documentation.  When this occurs the company works to get the proper paperwork in place after the assignment has begun.  Sometimes due to the urgency of the work, the contractor is engaged immediately with the promise of paperwork to follow.  So, what's the big deal?

Well it turns out that when a contractor is asked to complete and execute paperwork outlining terms and conditions of their assignment after they have been engaged, that documentation can be deemed null and void by the courts because it was completed after the engagement took place.  The contractor could contend that it was signed under duress.  Meaning that if they didn't sign it they might have lost that the assignment and the revenue.  They could contend that some of the terms and conditions, like non-compete, non-disclosure, were unknown to them and therefore unenforcible by law. There are a slew of exposures that can be caused by operationally putting the "kart before the horse". So, what's the solution?

First, don't let this happen. Create a policy whereby a contractor cannot be engaged or arrive to perform any work until all paperwork is completed and verfied.  This isn't always optimal but it might be better than the legal and cost alternative.  Educate offenders of this policy. 

Secondly, you can provide the contractor "consideration" for signing the document.  While the laws vary by state, provice and federal jurisdictions.  Most legal advice will direct that by paying the contractor a nominal sum of money in consideration for signing the contract post assignment, the effect is that the contractor was compensated for the contractual considerations and therefore, the contract is valid and thus the terms enforcible.

As with many things in life, something so simple or small can be very dangerous.

Check in with us next week while we explore more news and prevention strategies in the world of employer of record services.

NOTE: We strongly recommend that you consult your legal counsel on the proper activities before your institute any of the recommendations in this post.  These are merely operational guidance.

 

 

 

Be Prepared...Create Policy

In our series this week about preventative measures organizations can take to mitigate risks and costs associated with the use of Contract Labor, we wanted to address the first line of defense...Be prepared.

Like the Boy Scouts mantra of "Be Prepared", there is no better way of mitigating the risks you might have if your firm were to be pulled into a tax audit for the misclassification of employees.  As a basic in Human Resource Management, your firm should work with HR and Legal to craft the company's general position on the usage of independent contractors.  That policy should include, but not be limited to:

• How to Engage a Contractor?
• What are the Legal Requirements?
• What is the Tenure Policy?
• What Information do I need to Gather?
• Who do I Need to Contact?

In addition to the policies, create an educational FAQ that can be accompanied to the policies and demonstrate that your organization has take the proper steps to protect, document, and educate its company.

Remember, if you do all these things you won't prevent an tax audit nor will you avoid potential penalties, but having these items in place and documented will demonstrate to the courts and the auditors that you took the right actions to try and "prepare" yourself as best as you could.

If you want help in getting prepared, don't hesitate to take our free Risk/Reward Assessement to determine what exposures your firm might have.

 

 

Misclassified Workers - 4 Steps to Prevent the Risk

Over the past month we have been instilling a lot of F.U.D. into our readership.  F.U.D. stands for Fear, Uncertainty and Doubt.  Now, what good service provider would do such a thing without coming back with some solid solutions?

Therefore, over the next few weeks we want to focus our attention on solutions to the problems that are mounting in the general area of Misclassified Contract Workers.  If you are new to the PSC Blog Train, read some of our past posts on the market forces that are bringing these risks to light.

How can I protect my organization against Tax Audits and misclassification risks?

First off, let us say that nothing can make your organization "bullet-proof".  We live in a litigious society that allows for both individuals and governments to pursue action freely.  However, it is how your organization puts processes and procedures into place that will determine the level exposure you have. NOTE: We strongly recommend that you consult your legal counsel on the proper activities before your institute any of the recommendations in this post.  These are merely operational guidance.

1) Be Prepared 

Like with most legal actions, the court will look more favorably on an organization that has taken prudent actions to demonstrate the diligence to comply with the laws.  Ignorance is never an accepted excuse by the court. Make sure your organization has taken documented action to be compliant about the engagement of contractors.

2) Have Documented Policies

Demonstrating to the authorities that your firm was diligent in attempting to follow the rules and comply will often minimize the exposure in terms of penalties.  The organization that get hit the hardest are those where the intent is pecieved as maliciously trying to avoid the tax or claiming ignorance.  As a bona fide employer you are obligated to know the laws and comply. 

Document policy that is periodically distributed to your organization that stipulates the company's position on the use of contractors and the steps that should be followed to engage such resources.

3) Outsource/Centralize Management

Many organizations have begun to outsource the management of independent contractors to 3rd parties. This is a great way to demonstrate an effort to provide compliance and organization to the process.  It also defers the risk to the outsourcer to manage and shield yourself from the risk.  One of our clients once described outsourcing independent contractors "as a cheap form of insurance".  Any associated processing fees that an outsourcer would charge, are cheaper than your corporate insurance, headcount to manage and the potential risks of penalties. We'll expand on this point more in next week's post.

Another alternative is to centralize the management of this within Human Resources or Procurement.  Much like the outsourcer, the centralized organization is responsible for compliance and consistency in the processing of contractors, however, it does not provide that layer of 3rd party protection.

4) Inspect

Insure that you periodically inspect the processes and procedures with internal or external counsel.  Case, Federal, State/Provincial laws change often and can effect what and how your policies and procedures need to change.  Rigor of the program processes must be checked from time to time to insure there has been no degradation in the exception processing.

There is a lot more to cover and we will continue to bring you more enlightenment over the next few weeks.  In the interim, if you want to take our Free Risk Assessement, please click and answer the 5 easy to answer questions and we'll be back to you with an overview report.

Have a safe weekend.

 

 

Overtime Rules, Another Area for Concern with Contractors

We never want to be perceived as the "harbinger of doom", however we feel an obligation to bring our readers some more information about the potential risks associated with the use of Independent Contractors.

Additionally, it should be clear that we are proponents for the use of this flexible workforce, however, we feel obligated to insure that if not properly managed, the repercussions can be costly.

This recent article points to some of the additional exposure areas that can be challenge to human resource management, legal and procurement with the use of contractors.

The IRS has stepped up enforcement of rules regarding independent contractors. Early this year, the IRS started deploying auditors to conduct intensive audits of an estimated 6,000 employers in different industries and including both large and small companies. The federal government believes that misclassification is on the rise given that independent contractors receive fewer incentives to trim costs during these difficult economic times. The IRS is engaging in vigorous enforcement for various reasons, including to collect more money for the federal tax coffers and as a result of the Obama administration’s friendly approach to labor...

...If a worker has been misclassified as an independent contractor, the worker could be entitled to seek overtime payments for work performed. Independent contractors with newly conferred employee status also may seek other benefits, including unemployment benefits or workers comp, or bring legal action that they would not have done when they thought they were independent contractors.

But that is just the start. While misclassifying a single worker may lead to some liability for overtime payments and other benefits, employers should take a hard look at the bigger picture. An IRS audit could possibly lead to an audit by the federal or state Department of Labor. Such an audit might examine a company’s overall approach to independent contractor classifications and overtime. In fact, Obama’s 2011 budget proposes a joint task force of the IRS and DOL to crack down on independent contractor misclassification.

In addition, workers who believe they have been improperly classified and are owed overtime could band together and bring a class action. That is what is currently happening to Blackwater Security Consultants.

So beware – misclassifying an independent contractor can have substantial, costly consequences, from having to pay overtime and other benefits to one misclassified worker – to an overtime audit of your entire workforce to a class action lawsuit for unpaid benefits and/or overtime.
 

Will "Misclassification Initiatives" Reduce Employers' Use of Independent Contractors?

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.

 

 

Steps to Avoiding Co-employement Risk with Independent Contractors

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.

1. Set tenure thresholds that limit the time in which an individual can serve in one position as a contractor within your company.
2. 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
3. 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.

 

Recovering Economy, Retiring Workforce and Universal Healthcare...the making of the Perfect Storm.

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:

1. Intensified growth in the contingent workforce over the next 10 years to two times the current average daily employed (6 million).
2. Expansion of the current trend to broaden the skill segments used.
3. 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.