Independent Contractor Compliance Blog - by Collabrus™

DENVER, CO - The Colorado state legislature enacted the Misclassification of Employees as Independent Contractors Act this summer. The new law follows a national trend of making it more difficult for employers to misclassify their workers by creating a complaint process for workers who believe that they have been misclassified as independent contractors.

The Colorado law applies only for purposes of unemployment insurance, but it gives the Colorado Department of Labor and Employment’s Division of Employment and Training authority to issue Advisory Opinions to employers seeking advice on the proper classification of workers. The new law also adds strict penalties for misclassification.

Big Fines for Misclassifying Employees in Colorado

Specifically, the act creates a fine of $5,000 per misclassified employee for the first misclassification, and up to $25,000 per misclassified employee for a second or subsequent violation. It also provides, upon a second or subsequent misclassification with willful disregard, the employer will be prohibited from contracting with, or receiving any funds from, the state for up to two years.

Across the country politicians are concerned about the increased misclassification of workers and the related amount of UI benefits being paid to out of state coffers

California - Last fall Governor Schwarzenegger called for an increase in collections of UI taxes and a reduction of UI benefits in order to head off bankrupting California’s UI system.  This issue was one of the key initiatives identified for the Tax Commission he formed to make recommendations on revising California’s tax system.  Their report is due at the end of this year.

Washington DC - Last month, Rep. Jim McDermott, D-Wash., chairman of the Ways and Means Subcommittee on Income Security and Family Support, introduced a bill to extend UI benefits running through Dec. 31, 2010, instead of expiring as scheduled at the end of 2009.  McDermott’s bill would also keep in force the extra $25 per week in benefits under the stimulus bill through 2010.

IRS - May 2009, IRS Commissioner Douglas Shulman told Congress he is using the increased IRS funding he received this year to hire 4,500 new revenue agents to close the Tax Gap.  The IRS publically states the problem of independent contractors as a significant contributor to the Tax Gap.

GAO - A General Accounting Office (GAO) report, issued in January 2009 to Congress, states that the IRS is falling behind in the collection of federal employment taxes.

ICE - The U.S. Immigration and Customs Enforcement (ICE) is conducting a new I-9 audit initiative, issuing Notices of Inspection (NOIs) to 652 businesses nationwide in just the past few weeks, which is more than were issued all of last year.  There are significant fines for violations.

California’s Department of Industrial Relations (DIR) - The CA DIR’s current website boasts of its creation of the Economic and Employment Enforcement Coalition (EEEC).  The website states, “The EEEC is a partnership of state and federal agencies…conducting vigorous and targeted enforcement against labor law violators…California needs stronger enforcement of the current labor laws.”

The Wall Street Journal predicted in June 2009 that “Washington’s focus in the area of economic and domestic policy will be shifting to include…increased tax law enforcement.” 

There are federal bills similar to the new Colorado law

These bills were sent to committee and are awaiting further action.  However, if for no other reason than who their sponsors are, I predict they will regain life after the Health Care bill is resolved and Congress begins to search for new ways to produce revenue. 

1. H.R.6111 was sponsored by Rep Robert E. Andrews, NJ and cosponsored by 23 other Representatives
2. Senate Bill 2044 was sponsored by then Senator Obama. The Co Sponsors were: Senators Barbra Boxer; Richard Durbin; Barbara Mikulski; Hillary Clinton; Edward Kennedy; and others

Both of these bills are very similar and include provisions to:

• Give the IRS the authority to force employers to reclassify workers
• Eliminate the current IRS’ Safe Harbor provisions
• Require a poster that must be posted by businesses to inform workers of their right to challenge their classification as independent contractors
• Provide a mechanism for IC’s to complain about their status, which would lead to an audit/investigation
• Require the Department of Labor to also investigate and fine violators

It’s a biased system and the consequences are expensive

The point is as the government needs more revenue, tougher enforcement of IC compliance will be a key method of increasing collections.  Remember, government employment tax auditors and other labor law enforcement agencies have a primary mission of identifying misclassified independent contractors and then collecting back taxes, with interest and penalties for the error.

Once it has been determined that you are out of compliance, in most cases, you are placed on the government’s “Watch List” to insure you continue to comply with their ruling.  That could mean follow up audits or investigations down the line.

With Collabrus you can act now to insure you have done it right and can prove it when you are challenged.