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Consequently, many businesses have classified individuals as “contractors” who are in reality, employees. A main factor is control over the manner, method, location and timing of the work performed. Other factors include whether the business provides tools, training, performance reviews, business cards or other indicia of employment. If sufficient control is exerted, and other factors exist, the worker is likely an employee and not a contractor.

Properly reclassifying former contractors as employees can be costly for businesses. To ameliorate such expenses, and ensure proper classification going forward, the IRS has launched a Voluntary Classification Settlement Program (VCSP) which is designed “to increase tax compliance and reduce burden for employers by providing greater certainty for employers, workers and the government.”

Under the program, employers who meet certain eligibility requirements can reclassify these individuals and obtain what the IRS calls “substantial relief” on any back taxes otherwise owed, by paying only a fraction of the amount that would otherwise be due. No penalties or fees will be assessed. The employer is required to then abide by certain restrictions going forward, including maintaining these individuals as employees.

However, be mindful that there are areas of exposure for employers here. True independent contractors who work over 40 hours in one workweek are not entitled to overtime pay. But, employees who work that many hours are. If an individual is converted to an employee from a contractor under the IRS Settlement Program, the amnesty involved does not apply to any overtime pay your company may be liable for. For that reason, it may be best to consult with an employment lawyer prior to engaging in any reclassification project—through the IRS or otherwise.
 

Significantly, EMPA would:

·        codify misclassifications as a violation of the Fair Labor Standards Act 

·        establish civil monetary penalties for employer recordkeeping violations

·        create a legal presumption that, if an employer fails to keep accurate records, the individual is an employee rather than independent contractor

If EMPA passes, it will be even more important for employers to be diligent about properly classifying their workers and maintaining adequate paperwork to support their determinations. 

Even while EMPA is winding its way through Congress, however, employers need to be aware of potential issues regarding misclassification. As we have discussed before, the DOL and IRS are working together and with the states to increase enforcement of independent contractor classifications, particularly in the following industries: construction, janitorial work, hotel/motel services, food services and home health care. Indeed, in his testimony, Harris discussed how the DOL recently hosted a State Forum on Misclassification, which was attended by representatives from New York, Connecticut and other states. There also is a joint initiative between the DOL, IRS and 39 states to share information to target employer audits for unemployment insurance and misclassification purposes. 

In addition, Harris reported that the DOL is considering implementing a regulation that would require an employer, before classifying a worker as an independent contractor, to perform a written analysis that would be disclosed to the worker. The employer then would have to retain records of its written analysis and make them available in the event of an audit. Apparently, the DOL believes that it has the power to issue this regulation without waiting for EMPA to pass.

In sum, with all that is going on in Congress and at the DOL, it is clear that employers need to be attentive to the misclassification issue and err on the side of caution.

As noted in a statement by Secretary of Labor Hilda Solis, the new bill would provide workers with the “critical workplace protections and employment benefits to which they are legally entitled.” The focus on proper classification is also recognized as a revenue-generating measure for the government. (“It is estimated that Ohio loses at least $160 million a year . . . from worker misclassification.”)

While the bill may provide some clarity in this area, currently different agencies apply different tests to determine whether a person is an employee or an independent contractor. The Department of Labor applies a seven-point test, while the IRS applies a slightly different test. Indeed, we recently wrote about stepped-up IRS enforcement of misclassification of independent contractors.

The point is that someone providing services for your company is not an independent contractor just because you and the individual agree to that status. The bookkeeper that comes in one day a week may well be a part-time employee. It depends on the nature of your relationship, the amount of control you impose, and a myriad of other factors. Given the increased legislation on both the state and federal levels in this area, it would be prudent to ensure that those who provide services for your company are properly classified.
 

Correct classification of independent contractors depends on weighing multiple factors, including without limitation: the autonomy exercised by the worker, who controls his/her performance and schedule, where the work is performed, who owns the tools required to perform the work, whether the worker works for one or more different companies at the same time, whether the parties have an agreement and if so, what intent is evidenced in the agreement, and other factors.

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 taskforce 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.