WHY PAY TOO MUCH?
by Maria Ricci, General Manager
PSC’s service offering is singularly that of a Professional Employer Organization. This is our key differentiator in comparison to a 
staffing company. We do not participate in any recruiting activities. We provide 3rd party independent contractor engagement and billing services to those corporations who are manning their Independent Contractor population on their own, bringing known independent contractors back from previous projects or pay rolling independent contractors through staffing companies for long periods of time.
A staffing firm’s primary objective is to supply quality contractors to corporations when needed. Speed and quality is of the essence. In order for a staffing firm to enable this operation and maintain a high level of satisfaction within their customer base they need to continuously invest. The majority of their spend goes toward the marketing and maintenance of these contractors. The corporation pays for that of course. At the outset, that is reasonable, considering that the corporation does not necessarily have the time or the savoir faire to do their own contingent workforce recruiting. It begins to get costly for the corporation when the contractor is needed for a longer time period but cannot hire them on permanent status: head count restrictions, permanent hiring freeze, project delays, additional workload etc...
Temporary to Permanent, without any additional fee clauses, are popular and beneficial to the corporation when the corporation can hire the contractor on a permanent basis. When the corporation cannot, often the corporation nor the contractor is allowed to continue their relationship unless the corporation buys the contractor.
Why choose a PEO:
- Reduced costs
- Standard Rate across the board – rate management through established rate cards
- There isn’t Temporary to Permanent placement clauses. This means that you can end and rehire the contractor as you wish if he has already been identified by the corporation through previous projects or placements with staffing firms.
- Turnover. Although this practice lacks in professionalism and good business etiquette, it is happening in the marketplace today. Because a PEO is not in the recruiting business the risk of offering your contractor a better opportunity is nonexistent.
- Proper classification of contractors reduces risks of co employment
- Proper processing of contractors ensures the right agreements and paperwork are signed and provided by the contractors to ensure the protection of the corporation, the contractor and the PEO.
The transition to a Professional Employer Organization can represent substantial cost savings for the corporation and therefore, why pay too much?
To learn more about PSC please do not hesitate to contact us at: info@paymentservicescorp.com or take our free Risk/Reward Questionaire. click below
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
Continuing a trend in Congress to limit employers’ use of independent contractors, on April 22, 2010, Rep. Lynn Woolsey (CA) and Senator Sherrod Williams (OH) introduced the Employee Misclassification Prevention Act (H.R. 5107, S. 3254) (“EMPA”) in the House and Senate respectively.
The EMPA would amend the Fair Labor Standards Act (“FLSA”) and render worker misclassifications a violation of federal law. Employers would be required to maintain records reflecting hours worked and wages paid for employees and non-employee workers. They also would be required to provide workers a “notice” that identifies:
- The worker’s classification
- A yet to be created, Department of Labor website (containing an on-line complaint link)
- Contact information for the applicable Department of Labor office
- Other additional information as prescribed by regulation.
For workers classified as non-employees, the Notice would be required to state:
Your rights to wage, hour, and other labor protections depend upon your proper classification as an employee or non-employee. If you have any questions or concerns about how you have been classified or suspect that you may have been misclassified, contact the U.S. Department of Labor.
Employers who violate the notice and/or record keeping requirements or misclassify a worker would be subject to a civil penalty of up to $1,100 per worker for a first offense and up to $5,000 per worker for willful or repeated violations. Employers who misclassify workers and violate the minimum wage and overtime requirements would be subject to
treble damages (3X). The proposed legislation also contains broad anti-retaliation/discrimination provisions.
To enforce the Act’s provisions, the Department of Labor would be directed to perform targeted audits focusing on employers in industries that frequently misclassify employees. The Department of Labor and Internal Revenue Service would be permitted to refer incidents of misclassification to each other. The states would be directed to increase their own penalties for worker misclassification, conduct audits for the purpose of identifying employers who misclassify workers, and report the results of the audits to the Department of Labor on a quarterly basis.
While the EMPA is in the earliest stages of consideration by both houses of Congress, its introduction is significant because it follows introduction of the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (“TRAC”) (H.R. 3408, S. 2882), which would revise the Revenue Act of 1978’s safe harbor provision (the safe harbor provision allows an employer to treat a worker as a contractor if certain requirements are met), make it more difficult for employers to classify workers as independent contractors, and significantly increase employer penalties in the event of misclassification. It also follows President Obama’s proposed budget for 2011, which includes significant funding for the U.S. Department of Labor’s Wage and Hour Division to increase the Division’s number of investigators, train investigators to detect misclassification of workers, and focus on industries where misclassification is most prevalent. In sum, the EMPA serves as a reminder that curtailing employers’ use of independent contractors remains a significant issue in Congress. Employers who have not yet done so would be well-advised to review their independent contractor relationships and ensure that they are on the up and up before the Department of Labor and/or a corresponding state agency does it for them.
Most of us are aware of the past actions to Microsoft and more recently UPS and FedEx in the IRS's pursuit of tax revenue via misclassified worker investigations. 
But if misery loves company, these firms have lots of friends.
Here are some that have line up as their closest "friends":
- Hewlett-Packard (Marks v. Hewlett Packard Company)
- Time Warner Inc. (Herman v. Time Warner Inc.)
- Allstate Insurance Company (Equal Opportunity Employment Commission v. Allstate Insurance Company/Romero v. Allstate Insurance Company)
- S.G. Borello & Sons, Inc. (S.G. Borello & Sons, Inc. v Department of Industrial Relations)
- ...and many more have suffered the consequences of worker misclassification.
Perhaps FedEx Corporation’s legal battle will become the newest landmark case, with approximately 30 state class action suits and an Employee Retirement Income Security Act (ERISA) class action filed against the company; settlements are estimated by some to be $1 billion.
Already a California appeals court decision in August 2007 ruled in favor of the plaintiff and FedEx lost its appeal of a $5.3 million verdict. The verdict resulted from a class action that claimed FedEx treated its independent contractors as if they were employees but did not provide them with payment and benefits that full-time employees would receive. The ruling proved that the workers in question, delivery drivers for FedEx Ground, were in fact employees of FedEx and not independent contractors due to the level of control that the company exercised over them.
And if all of the recent legislative action, lawsuits and case studies aren’t eye-opening enough, employers now have more to be concerned with, as current data analysis tools on the market, already in use by several State Unemployment Insurance agencies, allow users to easily analyze the IRS 1099 abstract file with technology that searches and identifies triggers for an audit.
With this technology, a user can establish criteria for queries and can target employers for an audit if, for example, a worker received only one IRS Form 1099 within one year but is paid what the agency views as high-level income. In this case, the agency might suspect that the employer was concealing full-time employment in order to avoid paying unemployment taxes. In the event that an independent contractor is reclassified to employee status during an audit, the employer is responsible for all back taxes, including employer and employee contributions and of course, applicable penalties and fines.
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.
In our continuing coverage of the government's stepped up efforts to reign in misclassified workers, the US Department of Labor (DOL) in the Obama 
administration, is now softening and trying to change the predatory approach and is trying to help employers with an internet resource designed to assist employers in navigating the legal changes of federal employment regulations.
The new DOL Web site features a series of interactive online Advisors, which, the DOL claims, “help users determine if they are in compliance with federal employment laws by asking questions, providing information and directing the individual to appropriate resolutions.”
Topics covered include:
- payroll and overtime
- workplace poster requirements
- health benefits
- re-employment rights for returning uniformed service members
- federal contractor compliance
To see the site and learn more, the link is http://www.dol.gov/elaws/
CHECK OUT OUR NEXT BLOG WHICH WILL TALK MORE ABOUT THE D.O.L.'s GUIDANCE ON PREVENTION.
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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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Over the past few weeks we have been discussing and sharing a lot of the information that has been coming out about the IRS and the misclassificat
ion of workers. We have covered many of the tax and human resource management aspects of the mounting pressure coming from the IRS.
But what what is the cost risk. We found this article posted by a NY Lawyer and felt that it gave a good example and real numbers to the potential risks.
by Fred Abramson on April 16, 2010
I have a technology company as a client who recently retainedmy office to advise them on a relatively common employment law. The company signed a contract with financial institution to perform help desk related work. They hired ten people to perform the work and had each of them sign an independent contractor agreement. All of the workers performed the work on the job site only. The all worked solely for the technology company for 40 hours a week. The company just received an evil notice from the IRS. The IRS believes that the workers are misclassified as independent contractors and should be employees.
The technology company now wonders if there are penalties for misclassifying the workers as an independent contractor. The IRS looks in part at the intent of the employer. If the IRS reclassifies a worker from independent contractor to employee, the employer may be liable for a penalty based on the amount of the tax that was not withheld because of the original misclassification. If the IRS finds that the misclassification was an honest mistake on the part of the employer, and the employer filed proper returns, the penalty against the employer is:
• 1.5% of the wages paid to the employee; and
• 20% of the amount that should have been withheld from the employee’s wages for FICA, but was not due to the misclassification.
If the IRS finds that the employer failed to file the proper returns, then, except where the failure is due to reasonable cause and not willful neglect, the penalties double. Then, the penalties are:
• 3% of the wages paid to the employees; and
• 40% of the amount that should have been withheld from the employee’s wages for FICA, but was not.
If the misclassification on the part of the employer is intentional and therefore the employer intentionally neglected to withhold the necessary employment taxes, the limits discussed above do not apply in assessing the employer’s liability. The penalties for intentional misclassification are more severe. Moreover, the limits are not applicable to the employee’s share of the FICA taxes if the worker is a “statutory employee,” nor where the employer withholds federal income tax from the worker’s wages, but does not withhold FICA.
Lastly, if the required to pay an “employee reclassification” tax liability, the employer may not recover the tax assessed from the employee. In addtion, the employer may not deduct the amount of tax assessed from the employee’s wages. The Internal Revenue Code provides further that the employee’s liability for his or her share of the tax is not affected by the assessment or payment of the penalty tax by the employer.
If you have a legal question regarding independent contractors in New York, contact the Law Office of Frederic R. Abramson at 212-233-0666
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As the IRS has reported asking for significant funds to increase their agents in an effort to go after several new revenue opportunites, including misclassified 
workers. The tensions between parties has heated up again on Capitol Hill over actual numbers and costs. Here is an excerpt from an article titled, "Debate brews over expansion of Internal Revenue Service's workforce". click for full article
Republicans lawmakers are warning the law would put as many as 16,000 new Internal Revenue Service agents and workers on the streets. They claim Democrats tucked dozens of new departments and boards into the bill. And Sen. Jim DeMint (R-S.C.) predicts a massive expansion of the federal work force.
“There are going to be tens of thousands, maybe hundreds of thousands, before this is all over,” DeMint told POLITICO. “We are going to be looking for the real truth of what this means. Just on something as simple as having 16,000 IRS agents chasing them around, that is going to open a lot of eyes.”
There’s just one problem: Experts say the figures are highly speculative.
Administration aides, who were cognizant that creating massive new bureaucracies would be bad politics, have sought to minimize the potential for a major expansion, sources said.
But the Obama administration has done little to quiet this tempest, as the key players who will implement the new law have provided few specifics on how it may increase the federal payroll.
With the loss by the Republican's on the Obama Healthcare Bill you can bet this will be one of their next stands against Obama and the Democratic Party. Misclassification of employees will continue to be at the forefront of human resource management services.
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