Independent Contractor Compliance Blog

The unemployment rate is still climbing across the nation. For example:

• Michigan’s rate reached 11.6 percent in January, the highest in the country.
• Second-highest was South Carolina at 10.4 percent.
• Rhode Island was next at 10.3 percent, which marked an all-time high for the state.
• California rounded out the top four, when the Employment Development Department (EDD) announced the unemployment rate in California jumped to 10.1 percent in January, up from 8.7 percent in December 2008.

Two other states showed a 1.6 increase in a single month. They are:

• Oregon @ 9.9 percent
• North Carolina @ 9.7 percent

Wyoming has the lowest unemployment rate in the nation @ 3.7 percent.

What does this mean to IC compliance?

I’ve reported previously, but it doesn’t hurt to repeat myself from time-to-time, that employment tax enforcement agencies (both state and federal) get funded to a significant portion based on the number of people who file for unemployment insurance benefits. The more people who make a UI claim, the more money the employment tax agencies get to do audits. So as the unemployment rate (claims filed) increases, so do the chances of being audited.

The fastest way to an audit.

The single most common trigger for a misclassification tax audit is an unemployment insurance claim where the UI Office can’t verify wages the claimant claims to have earned. This is typically because the individual had been working as an IC-not an employee-and the business did not withhold, report or pay taxes for the worker as an employee.

Remember, only ex-employees are entitled to unemployment insurance benefits, so before an employment security agency (such as EDD) can pay an individual unemployment benefits, he/she must be determined to be a misclassified worker. Since EDD is in business (if you will) to pay out UI Benefits the government workers are inclined to determine the claimant (your former IC) had been misclassified as an IC, and had truly been an employee.

It’s a built-in government biased.

If the government determines you have misclassified your workers you are a prime candidate for an employment tax (or misclassification) audit. So whenever one of your Ex-IC’s makes a claim for unemployment insurance, and determined to be misclassified, it’s almost certain your company will be selected for an audit.

Typically, when economic times tighten businesses want to cut costs.

A common way businesses cut costs is by employing workers as independent contractors to avoid the costs associated with employees.  This strategy works if done correctly. However, in my experience, many businesses just call the worker an IC (it becomes a title) and still treat him/her as an employee. Doing this will guarantee a misclassification problem. In most cases the business wants to be legal but does not have the technical knowledge and experience to do it right.

It’s the Perfect Misclassification Storm

So just as times are getting difficult financially, several forces come together to create a Perfect Misclassification Strom.

1. Businesses decide to risk classifying workers as IC’s to cut costs
2. The government is becoming more biased to call individuals employees so they can provide more people with UI Benefits
3. More Ex-IC’s are making claims for UI because they can not find work
4. The government is getting more money to conduct more investigations and audits

It is a formula for misfortune.