If you’re like most of us these days, we’re taking time and carefully evaluating what we need versus what we want, what’s necessary and what’s a luxury. This is happening in households, and yes, in corporate boardrooms across the globe. Things are changing, they’ve been altered, modified and there can be a price to be paid. One thing that has changed is how governments are scrutinizing businesses today. In North America, both U.S. and Canadian governments are cracking down on companies who have a misclassified workforce, and the penalties for misclassified workers or contractors are steep. These government initiatives may be putting your company at an increased risk. So the question becomes are you certain that your needs in this area are adequately met by your current practices or should you be considering PEO (professional employer organization) services?
With that in mind here are:
5 ways a PEO services company can benefit your company
- Standardize the processing of all legal documents- Is all of your company’s documentation in order and meeting all the current requirements? PEO’s will implement a program that ensures your company is not at legal risk (very costly) for incomplete agreements, intellectual property exclusivity, non solicitation etc.
- Strict on boarding and engagement processes for every contractor- How is your company’s new hire process? Is it ironclad? Or are there shortcomings? Misclassification of workers is being felt by companies like Fedex and Microsoft and the government penalties have been in the millions of dollars. PEO services mitigate or eliminate these risks.
- Process automation- Each contractor is processed through an automated system with built in safeguards that control approvals, rates etc. that streamline your operations saving time and money.
- Expense processing automation- How does your company manage this? Is it failsafe? How much valuable time is being taken up with this task? How much are errors costing? PEO services automate the process dramatically reducing the risk of error and saving the time and effort staff are currently spending on this matter.
- Record and payroll management- Can you imagine not having to address all of the questions and concerns of your contractor workforce? What about co-employment issues, has your company ever had to cross that bridge? A PEO manages all of these issues and there can be significant cost savings both in staff time and legal fees associated with many of the issues that come up.
If you have all of this well in hand, great! But if you have any questions or concerns, get them looked into, contact a PEO and see how they can help, with the risks and penalties that are associated with companies who are found to be non compliant in regards to their workforce classification, we believe this is a necessity, not a luxury!
FedEx Ground has agreed to pay the state more than $3
million to settle claims that the company misclassified its drivers as independent contractors, Attorney General Martha Coakley’s office announced Thursday.
Coakley’s office had alleged that Pittsburgh-based FedEx Ground had made insufficient payments to the state for payroll taxes, worker’s compensation and unemployment assistance as a result of the misclassification.
In the announcement of the settlement, Coakley called it a “step to level the playing field for businesses.”
The settlement followed a joint investigation by Coakley’s office, the Executive Office of Labor and Workforce Development and the Department of Revenue. The investigation revealed that FedEx Ground’s misclassification of employees had resulted in “significant underpayments” to the Department of Revenue, Division of Industrial Accidents and Department of Unemployment Assistance, according to Coakley’s office.
The settlement also provides for a payment for the 13 drivers named in the attorney general’s citation, according to Coakley’s office.
FedEx Ground drivers in the state have also brought their own lawsuit against FedEx Ground - which is pending and not affected by the settlement with Coakley’s office - and FedEx Ground denies liability in the settlement, according to Coakley’s office.
On June 17, 2010, the Senate Committee on Health, E
ducation, Labor and Pensions conducted a hearing on the Employee Misclassification Prevention Act, S. 3254 (EMPA). The bill, which was introduced by Sen. Sherrod Brown (D-Ohio) on April 22, 2010, seeks to amend the Fair Labor Standards Act in several significant respects relating to the classification of workers as employees or independent contractors. The proposed legislation would:
Require employers to keep records of persons treated as independent contractors with respect to the hours worked by such individuals and the remuneration paid to them;
Require employers to maintain a record of the classification of each worker as an independent contractor or employee and to provide written notice of such classification to the worker, along with other notifications specified by the bill;
Provide for penalties to be imposed on businesses of up to $1,100 per person for violations of the recordkeeping requirements or for misclassifying workers as independent contractors, and up to $5,000 per person if the violation is found to be repeated or willful;
Provide for a presumption that any worker for whom the required records are not maintained is an employee of the company, which could only be rebutted by clear and convincing evidence that the worker is an independent contractor;
Provide for treble damages for willful violations of minimum wage and overtime requirements if the affected employee was misclassified as an independent contractor;
Require the secretary of labor to create a website that explains the rights that a person misclassified as an independent contractor may have and that would enable workers to file complaints online;
Provide for information sharing and coordination between the Internal Revenue Service (IRS) and the Department of Labor (DOL) with respect to misclassification issues; and
Restrict federal grants to state unemployment compensation systems unless the state has an auditing and investigation program that identifies employers not reporting compensation for unemployment compensation purposes.
In prepared remarks, Seth Davis, Deputy Secretary of DOL, made clear that DOL and the Obama Administration strongly support EMPA. Mr. Davis also noted that DOL’s Wage and Hour Division is actively considering a rule that would require employers, before classifying a worker as an independent contractor, to perform a written analysis of the worker’s status under applicable FLSA precedent, to provide a copy of the analysis to the worker, and to maintain a record of the analysis in the company’s files.
Opponents of EMPA remarked that the proposed legislation would impose enormous costs on owners of small businesses. Sen. Mike Enzi (R-Wyoming) estimated that it would cost billions of dollars for small businesses to comply with the recordkeeping requirements and would, for example, nonsensically require employers to notify employees that they were employees. He also noted that the audits would focus on recordkeeping rather than misclassification and fine employers simply for failing to keep proper records.
Although not the subject of the June 17 hearing, EMPA has been linked to the Taxpayer Responsibility and Consistency Act (TRCA), which was introduced by Sen. John Kerry (D-Massachusetts) on December 15, 2009. TRCA would amend §530 of the Internal Revenue Code in ways that would effectively remove the availability of the Code’s Safe Harbor provisions to all but a very few employers. The §530 Safe Harbor was originally enacted in the late 1970s to protect businesses that were relying on their industry’s long-standing practice of using non-employee workers for the performance of certain services, or on prior IRS audits that made no determination that independent contractors were misclassified. The idea was that the Safe Harbor would be temporary until a new independent contractor standard could be developed that was clear and objective and could be reliably and consistently applied. Contrary to that intent, TRCA would eliminate the availability of §530, except in a very few cases, without the adoption of a law that made the determination of independent contractor status clear and objective.
These legislative efforts, together with increased funding and enforcement efforts applied at both the federal and state levels, provide clear evidence of the increased risks and potential liabilities imposed on companies that use the services of independent contractors. Now is the time for employers to examine their independent contractor relationships and determine whether changes need to be made to those relationships or to the company’s practices in dealing with independent contractors.
The impacts of the new health care laws on contingent workforce management will not be fully understood for some time, and could be subject to change before they
take effect. But some provisions of great concern are approaching rapidly, including a little understood and newly highlighted 1099 reporting provision slated to take effect on January 1, 2012.
Like the proposed Employee Misclassification Prevention Act (EMPA) bill, this new requirement would “pierce the corporate veil” of hidden independent contractor vendors and require immediate discovery and control over challenging spend categories such as statement of work consultants and sub-contractors.
According to Michael Tanner, a senior fellow of the CATO Institute:
The latest surprise is Section 9006(b)(1) . . . which requires that businesses provide a 1099 form to every vendor with whom they do more than $600 worth of business over the course of a year. . . Of course businesses already have to file 1099s for outlays on items like consultants. But the new rule will mean that even the smallest of businesses will have to issue a form — and file with the IRS — for virtually every purchase or payment. Consider how many business transactions go on every single day in a $14 trillion U.S. economy. Millions, perhaps hundreds of millions, of forms will be winging their way between businesses and between businesses and the IRS. The potential for mistakes and lost forms would be tremendous. And with errors would come audits and penalties."1
With legislation like this already passed into law, there is no need to wait for the Employee Misclassification Prevention Act to start bringing SOW consultants and incorporated independent contractor vendors -- including project services spend -- into your centralized Contingent Workforce Management program.
You will be required to not only track this spend, but issue 1099s, starting in just a year and a half. Given the tremendous amount of organizational change such a requirement represents, enterprises should look to starting the process of a deep contractor risk assessment now.
After all, even if this particular provision affecting 1099s laws is extended or overturned, the message from legislators and regulatory agencies is clear -- there will be no more hiding of independent contractors for purposes of misclassifying workers.
1. Tanner, Michael. CATO Institute. “Health Bill Floods Business In Paper.” May 6, 2010. http://www.ajc.com/opinion/health-bill-floods-business-521926.html?tag=content;selector-perfector
Posted by Liz Greene
FIRST SUMMARY JUDGMENT RULING FROM THE FEDERAL MDL COURT HOLDS THAT ILLINOIS FEDEX DRIVERS ARE EMPLOYEES, NOT INDEPENDENT CONTRACTORS
In PSC's ongoing coverage of the Federal Express Cases on Employee Misclassification, we bring you the latest update from Illinois District Court.
June, 2010. Source: http://www.fedexdriverslawsuit.com/
FedEx Ground and Home Delivery drivers have been found to be employees under the Illinois Wage Act. The decision was issued by U.S. District Court Judge Robert Miller in the multi-district litigation that Judge Miller has been presiding over for the past five years. (In re: FedEx Ground Package System, Inc. Employment Practices Litigation, Cause No. 3:05-MD-527 RM) This holding came in a May 28, 2010 Opinion and Order granting summary judgment to the Illinois drivers under the Wage Act. The Court did not rule on other claims made by the Illinois drivers, but indicated it will address those claims separately. The decision is important in that it is one of a growing number of decisions in the past few years holding that the FedEx Ground drivers are employees and not, as FedEx claims, independent contractors. The essence of the cases consolidated before Judge Miller is that FedEx Ground has intentionally and consistently misclassified drivers as independent contractors, when they are in reality employees. Judge Miller specifically found that the Illinois drivers were employees under the Wage Act because their work was an essential and a necessary part of FedEx's business. As former CEO Dan Sullivan testified, the drivers are the "centerpiece" of FedEx's "workforce" and they are an "essential component" of the company's business. The Court noted the fact that drivers must wear FedEx uniforms and maintain a personal appearance satisfactory to FedEx. Contractors supply their own vehicles, but they must bear FedEx's logos and advertising. Further, FedEx structures the routes so that the trucks are in use 9 to 11 hours a day. Contractors can hire replacement drivers, but only with FedEx's approval. Finally, the Court noted that FedEx managers were obligated to have business discussions and customer service rides each year in order to maintain FedEx's image and reputation. Drivers' motions for Summary Judgment in 40 other states are pending. Currently, there are 63 lawsuits consolidated in the multi-district litigation. Motions for Summary Judgment have been filed, briefed and are awaiting decisions in almost all of these cases.
The Department of Labor (DOL) will find employers in violation of the law an
d will take legal action against them if they do not have an effective plan in place to protect workers from violations of their workplace rights. Companies without such a plan are breaking the law.
The DOL Spring 2010 publication, issued this week, specifically says, “Employers and others must ‘find and fix’ violations — that is, assure compliance — before a Labor Department investigator arrives at the workplace. Employers and others in the Department’s regulated communities must understand that the burden is on them to obey the law, not on the Labor Department to catch them violating the law. This is the heart of the Labor Department’s new strategy. We are going to replace ‘catch me if you can’ with ‘Plan/Prevent/Protect.’”
This means that companies must have a plan to prevent the misclassification of workers as independent contractors. The DOL investigates violations of the Fair Labor Standards Act (FLSA), which includes misclassifying workers as independent contractors. The DOL applies its own test (the Economic Realities Test, which has a different emphasis than the IRS’ 3 Areas of Control Test) for determining whether a company has misclassified an employee as an independent contractor. If the DOL determines that the worker was misclassified, and otherwise would have been entitled to minimum wage and overtime pay under the FLSA, the company may be required to pay the employee back wages and prospectively re-classify the worker as an employee entitled to minimum wage and overtime. These expenses can be cost-prohibitive.
This aggressive new policy exposes employers to investigations by the DOL – investigations in which employers will need to prove their innocence by showing that they have an effective plan in place to protect workers from violations – including violations of the FLSA.
Does your company have a plan?
PSC can help create and prevent. Contact us or take our Free Risk/Reward Assessment.
As we continue to report on the impending changes regarding the misclassification of workers, it is obvious that the changes being implemented will have long 
reaching effects on much of the Human Resource Related Services. As the article below shows, these changes will have an effect on the Fair Labor Standards Act (FLSA). Share with us where you're seeing impact.
Employee Misclassification Bill Proposes Changes to FLSA [Compensation.BLR.com]
Employers who misclassify their employees as non-employees are the target of a bill brought before Congress earlier this month. The bill would require organizations to keep accurate records of non-employees, such as independent contractors. Employers would also face new penalties for misclassifying employees.
The bill, referred to as the Employee Misclassification Prevention Act, proposes to make amendments to the record keeping and notice requirements section of the FLSA.
The bill would require employers who are subject to FLSA to keep accurate records of all workers, employees and non employees (e.g. independent contractors). Records would include the hours worked, payment, and classification of each worker.
Employers would have to give notices to all of their workers, employees and non-employees, upon hire or if there was any change of the employee's classification status. Written notices would need to:
- Inform the worker of their classification
- Direct them to the appropriate Department of Labor (DOL) website for further information
- Provide contact information to the local DOL office
- Include a special paragraph for non-employees regarding their rights
The bill would prohibit organizations from firing or discriminating against any worker, employee or non-employee, for filing a complaint, testifying in a hearing, or serving on an industry committee regarding misclassification practices.
The language of the Special Penalty for Certain Misclassification, record keeping, and Notice Violations-Section 16 of the FLSA would be changed to include "individuals" in addition to employees. In addition, civil penalties for misclassification practices would be increased to up to $1,100 per worker, and up to $5,000 per worker for willful repeat violations.
The bill also includes a provision for the Secretary of Labor to establish an employees' rights website.
In addition to the amendments proposed to the FLSA, the bill aims to make changes to the Social Security Act (42 U.S.C. 503(a)). The changes are intended to increase enforcement by:
- Improving auditing and investigative procedures
- Issuing quarterly report s to the Secretary of Labor on findings
- Establishing administrative penalties for misclassification practices
To increase effective enforcement of misclassification, the bill seeks to promote inter-department communication. The bill proposes that if any section of the DOL has evidence of an employer participating in misclassification, they should report the information to the Wage and Hour Division (WHD), who then can choose to refer it to the Internal Revenue Service (IRS).
The act would also allow the WHD to target employers for auditing purposes if they are in industry with a history of misclassifying employees.
The bill was referred to the Committee on Education and Labor and the Committee on Ways and Means for review.
The entire bill, H.R. 5107, is available online at the Library of Congress website.
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Finally, it seems like the US Government is going to put some tools into place to assist businesses with ensuring that they are compliant as it relates to classifying their workers properly. We agree with the article and there is no "magic bullet" but there will always be rule breakers but it would be nice to know if you are being 
compliant or not.
By STEVEN GREENHOUSE - The New York Times
In a move that will affect most American corporations, the Labor Department plans to require companies to prepare and adopt compliance plans aimed at ensuring they do not violate wage, job safety and equal employment laws.
The effort, aimed in part at reducing the incidence of employers not paying overtime and improperly classifying workers as independent contractors, will require them to document many of their decisions and share that information with their workers and the government.
In announcing the department’s intentions on Thursday, Deputy Labor Secretary Seth Harris said his department wanted to foster a culture of compliance among employers to replace what he described as a “catch me if you can” system in which too many companies violated employment laws.
Mr. Harris said many specifics of what companies would be required to do had yet to be worked out. The department’s proposed rules are still being drafted, and businesses will have a chance to respond before any final rules are issued. The process is likely to take more than a year.
But business groups attacked the general idea, saying it would impose new burdens on employers without necessarily improving compliance with labor laws.
Mr. Harris said that while many companies had a culture of compliance, too many others flouted wage and safety laws after weighing the costs of compliance against the benefits of breaking the law and the risks of getting caught.
“They are playing a dangerous game of catch me if you can, and they are putting workers’ rights, even their lives, at risk,” Mr. Harris said in an appearance at the Center for American Progress, a liberal research group in Washington.
Department officials say they hope the plan will greatly reduce problems in industries with widespread wage violations, like restaurants and discount retailing, and those with widespread safety violations, like coal mining and construction.
“Employers will have to put together a plan that is designed to avoid violations of workplace laws,” he said. “In safety and health, they will have to prepare a plan that will avoid safety hazard in the workplace. They will have to implement the plan, and they will have to make sure the plan, as implemented, is effective in avoiding violations for risks and hazards to workers.”
Mr. Harris said the limited number of Labor Department inspectors — a few thousand — makes it hard to protect the nation’s 140 million workers at nine million workplaces. “We cannot abide an economic calculus that exploits the fact that the Labor Department cannot and should not look over every shoulder,” he said.
Giving one example, Mr. Harris said companies that classify workers as independent contractors — often to avoid paying Social Security taxes and circumvent wage laws — would have to prepare a written explanation of why those workers should be considered contractors rather than employees. Companies would then have to give these workers the explanation.
Randel K. Johnson, senior vice president for labor, immigration
and employee benefits at the United States Chamber of Commerce, said the employer group wanted to see more details of the proposal.
“But it appears to open the door to a Department of Labor compliance officer second-guessing employers on a wide range of issues and micromanaging how employers run the workplace,” Mr. Johnson said. “A lot of time will be wasted figuring out whether or not compliance plans will pass the Labor Department’s judgment rather than actually addressing the requirements of the law.”
Cynthia L. Estlund, an employment law professor at New York University, praised the department’s plan because “it is important to activate internal corporate efforts for compliance.”
But Professor Estlund said violations would no doubt continue. “There are no magic bullets,” she said. “It’s still possible to engage in what some people call cosmetic compliance.”
So, you think all this hype about misclassification of employees is just a scare tactic? I don't think UPS the International Shipping Company feels that way after
the state of California gave them 12.8 million reasons to monitor their independent contractors. An this was just the state of California...
Hang on because as the Carpenter's song says, "We've only just begun".
Originally published March 1, 2010
The decision to classify workers as employees or independent contractors has always been difficult. But recent events suggest that the choice, or at least the consequences of getting it wrong, is also expensive. The benefits of classifying workers as independent contractors, especially where the distinction is close, may no longer be worth the risk.
Only a few weeks ago, shipping giant UPS agreed to pay a staggering $12.8 million to settle a class action lawsuit over the company's alleged misclassification of delivery drivers as independent contractors rather than employees. In the summer of 2008, several of UPS's delivery drivers filed a lawsuit in the United States District Court for the Northern District of California. The drivers claimed they were wrongfully classified as independent contractors rather than regular UPS employees, and as a result, were denied the benefits and protections of, among other things, the Fair Labor Standards Act ("FLSA"). Particularly, the drivers focused on the FLSA's minimum wage and overtime guarantees.
According to the drivers, UPS controlled almost every aspect of the working relationship. For example, the drivers alleged that UPS required packages be delivered and picked-up at certain times, that UPS dictated the drivers' dispatches, set the prices, and even controlled what the drivers wore. Essentially, the drivers claimed they were such an integral part of UPS's business, that they could not be said to have any separate or distinct business of their own. The court allowed the case to proceed as a class action, and the group eventually included roughly 2,400 UPS delivery drivers.
UPS denied the allegations, but eventually agreed to settle the case for $12.8 million (the settlement received provisional approval, but must still receive final approval from the court). Because the case settled before either a judge, jury, or more helpfully an appellate court, could decide the issue, we cannot know whether UPS in fact misclassified its drivers. That is, it is unclear whether the examples listed above necessarily create an employer/employee relationship. What is clear, however, is that the decision to treat its delivery drivers as independent contractors rather than employees ultimately cost UPS far more than it saved.
The real question is whether this case is an outlier or a sign of things to come. There are no reliable, or at least readily available, ways to track the number of misclassification suits filed each year. Thus, we do not know for sure whether these types of cases are increasing. Nonetheless, anecdotal evidence suggest that misclassification cases are far more common today than in years past.
Accordingly, employers should be aware of the general rules for distinguishing between employees and independent contractors. Unfortunately, the distinction is not always clear or straight-forward. There is no single test that the courts will use to determine whether an independent contractor is actually an employee. With that said, there are a few tests that businesses need to be aware of when deciding whether to classify a worker as an employee or independent contractor.
For example, the IRS has adopted its own test for distinguishing between employees and independent contractors. For several years, the IRS used a complicated 20-factor test. Recently, however, the IRS abandoned that test in favor of one based upon general common law principles. Under this new three part test, the IRS considers:
- the amount of behavioral control;
- the amount of financial control; and
- the general relationship between the parties.
There is no magic formula for determining how much control is too much, and the IRS is careful to point-out that no single factor is greater than the others. Businesses must look at the entire relationship. The more a business controls a worker, the more likely it is that an employment relationship exists.
Meanwhile, under the FLSA the courts use the "economic realities" test. This test focuses on the degree of economic dependence of the would be employee on the business with which he or she is connected. The more the worker financially relies upon the business, the more likely an employment relationship exists. The courts will consider factors such as:
- the degree of the employer's right to control the manner in which work is performed;
- the degree of skill required to perform the work;
- the worker's investment in the business;
- the permanence of the working relationship;
- the worker's opportunity for profit/loss; and
- the extent to which the work is an integral part of the business.
Control is the key. The more control a business has over the workforce, the more likely a court will find that an employment relationship exists, especially where the tasks being performed are an integral part of the business. Although there are countless situations in which courts will find that a worker is appropriately classified as an independent contractor, the UPS settlement is a reminder that the consequences of being wrong are severe, and that businesses should proceed with caution.
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According to CNNMoney.com, most states now share data with the IRS and a noncompliance finding by the IRS is likely to lead to issues with state labor
department and other state agencies as well.
All businesses that are trying to avoid paying unemployment insurance funds should take the steps needed to verify independent contractor classifications given the interconnectedness of the federal and state tax agencies as well as the new IRS compliance agenda.
So, you think the problem is the "Feds"? Nope, the states are all lining up in the exploration of revenue through misclassified employees. Over the past month, PSC has tracked articles and reports by; New York, Michigan, Iowa, Nebraska, Ohio, Tennessee, California, among others. Also, Montana, Maryland, New Hampshire & New Jersey have all filed suit against FED Ex for the misclassification of drivers. (a legal filing can be read citing the individual cases that the states are mounting against the Fed Ex Drivers Claim).
Tell us what's happening in your state?
Independent Contractor employer of record services is becoming more important than ever to prevent Compliance and Risk mitgation.
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