But are you really ready?

Just as you are thinking of increasing the use of IC’s and contingent workers the government is gearing up its workforce of auditors and investigators to penalize you for misclassifications.

Want proof?

FACT: In February of this year the Government Accounting Office (GAO) in Washington, DC issued a report to Congress criticizing the IRS for not being aggressive enough in collecting over $55 billion dollars of the Tax Gap a year in uncollected employment taxes.

FACT: In May the Commissioner of the IRS told Congress he was using part of the Economic Recovery Stimulus money the IRS was receiving to hire and train 4500 new IRS Agents to close the Tax Gap, stating many of them will be used to collect employment taxes due.

(If you ask, “Where are they? I haven’t seen them…” Remember the government moves slowly-very slowly, but once it gets started it has momentum and “grins exceedingly small those caught under its wheels” It takes the government time to announce the job openings, select the successful candidates, train them and send them out).

FACT: Last week the IRS announced it was conducting a pilot study to audit 5000 US businesses for employment taxes and misclassification of workers. The program begins the end of this year.  Depending on the outcome of that sample they may again expand the misclassification program nationwide, but either way those 5000 businesses will be audited within the next year or so…

FACT: Since at least the year 2003, the IRS’ Taxpayer Rights Advocate has been reporting to Congress, every year, Section 530 (the so much appreciated Safe Harbor law protecting employers) should be repealed or significantly amended to give the IRS more authority to enforce worker misclassification issues. This year Congress is listening because they are looking for ways to collect more revenue.

FACT: The State of California does not have a Safe Harbor law to protect you from an EDD audit.

FACT: In the past two years both state and federal law makers have been introducing bills to increase fines for misclassification and to make it easier for the auditors to identify misclassified workers. One of the toughest federal bills was actually sponsored by our current President when he was a Senator. Once the other issues are resolved (health care and budgets) it’s a safe bet both state and federal lawmakers will pick up those bills, dust them off, and pass them into laws.

If you are preparing for the economic recovery and thinking of engaging contingent workers and IC’s you need to be sure you are protected.

To be safe you need to establish a process for control and accountability in your consultant engagement process now, before you hire new staff and before the government knocks on your door.

• Significantly increase the penalties for “knowing and intentional” independent contractor misclassification.
• Establish a private right of action for an individual misclassified as an independent contractor.
• Allow a misclassified individual to be awarded triple civil damages if a court finds that the employer “knowingly and intentionally” misclassified the worker as an independent contractor. (”Knowingly and intentionally” is in the eye of the State of New York).
• Set the standard for IC compliance to be determined according to the standards of the Federal Fair Labor Standards Act (29 U.S.C. 201 to 219).
• Specify that the burden of proof is on the party for whom the work is performed to show independent contractor status “by clear and convincing evidence.” (”Clear and convincing” is in the eye of the State of New York).

The State of New York is just one of many that are taking much tougher stances on misclassifying workers. Many states, including Ohio, Vermont, Wisconsin, Connecticut, Colorado, Delaware and Maryland, have recently enacted laws targeting misclassification. A dozen others are considering new tougher laws. California, possibly already the toughest in the nation, also has several bills active to tighten down and add severe penalties for misclassification of workers.

The federal government has also been considering tougher legislation.

For example:

Senator John Kerry, D-Massachusetts, and Representative Jim McDermott, D-Washington, have both introduced almost identical bills this year that would

• 1. Greatly limit the current provisions of the Section 530 Safe Harbor.
• 2. Significantly increase penalties against companies who misclassify workers.
• 3. Require 1099 reporting of payments made to corporations.

The 1099 requirement for corporations is now law. It was a provision of the Heath Care Law passed earlier this year. The IRS is already working on how they will enforce this new requirement. For more on 1099’s for corporations see: The IRS is Requesting Input on 1099 Reporting Requirement for Corporations.

The federal bills also severely increase penalties. The proposed new costs for different types of violations range from $500 up to a maximum penalty of $3 million in certain situations.

However, possibly the most significant fact about these two federal bills is that President Obama himself co-authored a similar bill when he was a Senator, but it was lost in the confusion of his election campaign. He has since indicated he supports the newer bills and that he would sign them if either reaches his desk.

If you use IC’s in your business you need to be sure you are doing it right. This is not the time to gamble.

The article reports that, “The attorney general said the company had gained an unfair competitive advantage by classifying the drivers as independent contractors rather than employees.”

www.telegram.com/article/20100716/NEWS/7160413

FedEx Ground is paying but says it did nothing wrong.

Even though the company denied liability in the settlement the Massachusetts Attorney General’s Office determined that the courier company underpaid payroll taxes, workers’ compensation premiums and unemployment insurance taxes because it misclassified its drivers as IC’s.

In addition, “…the settlement includes a payment for 13 drivers named in the Massachusetts Attorney General’s citation,” said Harry Pierre, spokesman for the attorney general’s office. The article reported the workers would receive $15,000 each.  Typically these settlement amounts are to reimburse the drivers for expenses and overtime.

FedEx Ground’s misclassification problems in Massachusetts and across the nation are not over yet.

FedEx Ground drivers in Massachusetts still have a lawsuit pending against FedEx Ground that is not affected by this settlement, according to the Massachusetts Attorney General’s Office.

In addition, there are at least 63 other civil lawsuits, in 40 other states, involving some 27,000 drivers not connected to the Massachusetts Attorney General’s settlement still pending, according to information from Leonard Carder LLP, an attorney connected to this case.

The courier company is still trying to find a way to make its drivers IC’s.

According to the article, “…FedEx Ground did not admit to any wrongdoing in the settlement and FedEx spokesman Maury Lane said the company will institute a new independent service provider model in Massachusetts that will allow independent delivery contractors to negotiate contracts with the company for specific delivery areas.”

Boston lawyer Shannon Liss-Riordan, who sued FedEx five years ago in U.S. District Court alleging that the company misclassified drivers as independent contractors, said the company’s plan to institute a new business model in negotiating contracts for drivers will violate the state’s independent contractor laws.

“We’ve been in touch with the attorney general’s office on this,” she said. “The attorney general has not signed off on FedEx’s new model, and we expect to challenge it.”

No job for a Weekend Warrior.

If you want to use independent contractors properly, and avoid this kind of entanglement, engage an expert like Collabrus to help you, then take their advice.

WASHINGTON DC-The Internal Revenue Service announced this week it is using YouTube to market IRS job openings for revenue agents, revenue officers, criminal investigation special agents, financial analysts and economists about employment opportunities at the IRS.

IRS Commissioner Doug Shulman said, “Whether you’re a veteran or a recent college graduate, the IRS is a great place to work and build a career. The IRS has a wide range of jobs and needs a variety of skills to serve the nation’s taxpayers…”

If you’re interested you can view the IRS ad yourself at:  Working at the IRS,

The IRS believes that, “…showcasing our talented employees on YouTube gives applicants first-hand insight into whether or not they would be a good fit for a particular position.”

It’s not just YouTube the IRS has also launched a new “Careers Website”

In addition to the new YouTube playlist, the IRS recently launched a new IRS Careers Website with information on job openings. The site not only provides job information but markets the IRS.  It starts out with:

“The IRS is the foundation for all that our nation is capable of - and we’re depending on bright, capable citizens like you to achieve our goals. Use your talents to serve the American public and fund its future. You really can help make our nation a better place.”

Why am I telling you about this?

The IRS already has more than 100,000 full-time and seasonal employees and hires new employees throughout the year, but recently the IRS has been given thousands of additional positions to close the Tax Gap. This means while the economy is suffering the federal government is increasing the number of tax collectors and auditors to collect more money. It also means increased and tougher enforcement of IC misclassification laws.

This is no time for your business to be cutting corners in IC compliance.

The website article cited a University of Arizona study but failed to provide full information about the study and then gave bad advice if you employ highly skilled professionals. I have analyzed this article from two viewpoints:

1. Last time I covered it from an employee versus independent contractor POV.
2. This time I’d like to address the flawed article from a Best Practices POV.

Maybe I should mention that my MBA thesis paper correlated various workplace environmental elements to both long term productivity and expressed worker satisfaction for highly educated, professional workers:  In other words, how to keep your highly skilled, professional workers happy and productive in the long term. In addition, I have 30 successful years in supervision and management positions with professional level workers.

Here are a few of the quotes in the misguided article:

1. Traditionally hired employees are less satisfied with co-workers and bosses when working with larger proportions of temporary workers,
2. Having more temporary coworkers makes full-time workers’ jobs more complicated, since they are always training new people.
3. Helping temporary workers can get in the way of full-time employees completing their work…
4. …temporary workers (are) more negative about their work arrangements compared with standard workers…
5. Temporary workers who had opportunities to transition to standard employment had better attitudes and were better performers than their peers in standard work arrangements…

From these statements the vender company’s article implied that temporary workers are not a happy bunch and that your regular employees resent them being in the company. It urges you to treat everyone (IC and employee) the same and make temporary worker positions the road to a permanent job.

What’s wrong with the article’s conclusions?

Pretty much everything: This article does not draw a distinction between low level, semi-skilled workers and highly educated professionals. It apparently assumes both groups are motivated by the same career aspirations. The article failed to tell readers that the study collected data from part-time, and temporary workers who all performed “clerical and low-level administrative work (such as) payment processing, account reconciliation, and inquiry/complaint handling.” The workers in the study were trained how to do their duties and “tended to be assigned simpler, repetitive tasks with shorter completion times…”

It appears the website article was published by a vender who apparently thinks in terms of providing lower skilled workers to client companies-not high skilled and highly educated professionals. The article should be viewed in that light.

There’s a difference between repetitive, low skilled production workers and highly educated and highly skilled professionals.

Contrary to the website article’s conclusion, professional workers thrive on complex work assignments, including being the “go to person” for training and other special duties. In fact, I believe if today’s highly skilled professional workers are not challenged by their work they become bored and move on when a more challenging job becomes available. A high salary alone won’t keep them. Also the skilled professional worker wants freedom to perform the tasks assigned according to their own judgment and experience. They want to be able to make choices and have control over the work. If there is too much control over the work or if there is only one repetitive way to do the work they will get bored. They are not interested in simple, easily trained, repetitive tasks that offer no room for individual expression or unique problem solving abilities.  Therefore, highly skilled professionals thrive on complicated work assignments.

Only the lowest, most unproductive worker, who is simply putting in eight hours for a paycheck, would complain about being given more responsibility or being assigned more interesting and complicated duties to perform.

Also, I believe when a highly educated, top notch professional comes into a company to do a job they usually bring a unique set of skills the company is missing. They are appreciated for this contribution-not resented.

Finally, many of today’s highly educated, top notch professionals do not want to be tied down twenty or thirty years to the same employer, doing the same duties year-after-year. They are mobile. They want to move-on and move-up, taking on new challenges. They aren’t interested in a temporary assignment that is a doorway to a long term employment relationship.

So if your company employs contingent workers (IC or employee), who are highly skilled and highly educated professionals, you can toss the work force vender’s website article because it doesn’t apply to you.

You may also want to rethink your contingent worker vender-both employee and independent contractor-to insure they are meeting your professional staffing needs.

I won’t cite the author, or organization, publishing the web article; however, we tracked down the original University of Arizona study and a series of published reports* on the methodology and conclusions on the original study. The following is a summary and critique of the website article that cited the university study.

I will analyze this website article from two viewpoints:

1. From an employment tax law POV (especially employee versus independent contractor issues).
2. From a best practices management POV.

In this first article I’ll cover the IC Compliance implications. In the next article I’ll cover some management best practices issues.

The website article does not do justice to the actual university study performed and will create problems if you applied the conclusions to your professional IC consultants. 

The website article states:

1. Treating the population of nonstandard employees as a separate workforce (is bad)…
2. Having more temporary coworkers makes full-time workers’ jobs more complicated, since they are always training new people.
3. Helping temporary workers can get in the way of full-time employees completing their work…
4. In the minds of full-time employees their jobs have diminished status when temporary workers occupy similar jobs…
5. Employers can improve the situation by encouraging social interaction among all workers and including temps in thinks (sic) such as formal and informal departmental lunches and holiday parties…
6. Temporary workers who had opportunities to transition to standard employment had better attitudes and were better performers than their peers in standard work arrangements…

Acting on the implications of these statements will weaken your independent contractors’ status.

First, the web article fails to mention this study was done on temporary employees (not IC’s). The article also fails to note the study data was collected on 314 part-time and temporary workers who all performed “clerical and low-level administrative work (such as) payment processing, account reconciliation, and inquiry/complaint handling.” 

None of the workers studied were professional level contingent workers or independent contractors.

So the first mistake the website article makes is not providing this important information. Next, the article misleads the reader by giving the impression you should apply these statements equally to professional level IC’s as well as temporary, low skilled employees.

Which leads us to item 1: You must treat your contingent workers differently than your regular employees, unless you want them to become your regular employees. The more you treat someone like a regular employee the more he/she looks like an employee to a government agency. 

Item 2:  If you train your IC you have just introduced direction and control over how to do the work, which is a major element in creating a misclassified employee.

Items 3 & 4:  If the work being done by the independent contractor consultants is substantially the same as the employees’ work you have blurred the distinction between the two.

Item 5:  Inviting IC’s to functions (such as social events and company meetings) with your employees is another nail in the misclassification coffin, again blurring the distinction between the two.

Item 6:  Creating a temporary IC worker position that may transition into a regular employee position is simply a probationary employee and is considered an employee by government enforcement agencies and for most civil issues.

It’s the old “If it walks like a duck and quacks like a duck…” test

The bottom line is you must treat your temporary workers differently, in significant ways, from your permanent employee staff. Blurring the distinction by treating them the same, makes their status homogenous and will create a misclassification nightmare for your company.

Next time I will make some management best practices observations on this misleading article.

—————————————————

*FOOTNOTES–SOURCES

          1. MIXING STANDARD WORK AND NONSTANDARD DEALS:  THE CONSEQUENCES OF HETEROGENEITY IN EMPLOYMENT ARRANGEMENTS JOSEPH P. BROSCHAK, University of Illinois at Urbana-Champaign ALISON DAVIS-BLAKE, University of Texas at Austin

2. Nonstandard, Not Substandard  The Relationship Among Work Arrangements, Work Attitudes, and Job Performance

Joseph P. Broschak, University of Arizona; Alison Davis-Blake, University of Minnesota; Emily S. Block, University of Illinois at Urbana-Champaign

3. Speed Bumps or Stepping Stones, The Effects of Labor Market Intermediaries on Relational Wealth, ALISON DAVIS-BLAKE AND JOSEPH P. BROSCHAK

I was recently home for a week watching television, sleeping and fighting off a bug. I was feeling better later in the week and took a walk around the neighborhood. As I passed my neighbor’s house, their 23 year old daughter was getting out of her car. She smiled and waved at me. She was dressed in a very professional business suit. I was used to seeing her in jeans or shorts, so seeing her dressed so professionally I thought maybe she had a job interview.

She graduated from college in May 2009, and for the past year had been sending out resumes in an attempt to join the working ranks of young adults with a career job. Like many of her classmates, I knew she has been frustrated-not even getting an interview. I thought maybe her luck had changed and she’d had an interview today, so I asked…

“Did you have an interview today?”

Her luck changed last month

“No, I’m working!  I’m a freelance software engineer with (company name). I started last month! I love it!” She was her usual vibrant self.

We talked about her new job for several minutes and I learned that:

• For the past year she had been sending resumes out everywhere possible, searching websites, talking to contacts, doing everything she could to find a job.
• This position came along and they told her they were only accepting new people on a freelance basis-as independent contractors.
• She showed me her new ID badge with her picture, the company name and her title: Contract Engineer.
• She works Monday through Friday-8:30 AM to 6:00 PM.
• The pay is lower than she hoped for but she expects it will get better after she learns more.
• She is provided with a work station, computer and supplies.
• She thinks her boss is great-he’s so helpful and willing to teach her what she needs to know about their systems and her duties.
• She’s hoping a permanent position will be offered to her. In fact, the young man working in the cubicle next to her started three years ago, on a freelance basis, and is now an associate engineer with a full benefit package.
• She’s very excited about this opportunity-a chance to get experience and a shot at a real career…

I didn’t want to burst her bubble, but I thought to myself, “Classic Misclassified!”

Her story is a textbook example, used in training for government tax auditors, of a misclassified worker.  It’s the “I just needed a job and agreed to do it because it was offered…” scenario.

There’s a classification time bomb ticking in this engineering company…

One of these days, a “freelance” engineer at this company will be let go or decide he/she is getting a raw deal and either:

1. Apply for Unemployment Insurance benefits, or
2. Get hurt on the job and file a workers comp claim, or
3. Hire an attorney to file suit for employee benefits.

The whistle blower most likely will not be my neighbor’s daughter. It’s not her personality. However, based on what she told me, I believe the company is utilizing a few dozen “freelancers” and the odds one or more of them will eventually turn on the company is pretty high. When that happens the company is in for a rough and expensive wake up call.

Hopefully this company will decide to seek out an expert advisor, like Collabrus, before the Department of Labor, IRS, EDD or a civil lawsuit knocks on their door.

If you spend your daytime hours working, you may not realize there are packs of predators stalking the underemployed, the unemployed, the disabled and the disgruntled on daytime television commercials. These predator TV commercials are airing during normal work hours when the rest of us are at the office. They are seeking individuals who are sitting at home, disgruntled about their life and careers, and wanting more money. The predators are encouraging these disgruntled people to file law suits against their former, and even current, employers or client companies for a long list of alleged damages.

A typical message may ask, “Do you believe you are a misclassified independent contractor? Call 1-800-blah-blah for a free consultation. You may be entitled to a large monetary settlement.”

I was shocked at the bold, aggressive nature of these solicitations-these attacks on American business. I saw several commercials by law firms who specialize in suing companies for misclassifying workers. These firms are telling daytime viewers that IC’s are potentially misclassified employees and may be entitled to bring actions against their client companies for overtime, business expenses, and a full range of fringe benefits.

They’re not just hunting disgruntled IC’s. There are also commercials that target part-time and contingent workers by asking:

• Does your employer take advantage of you?
• Have you been injured on the job?
• Are you disabled?
• Not paid for overtime?
• Are there others doing the same work and getting more money?
• Travel expenses not paid?
• Rest breaks denied?
• Being told to work before punching in or continue working after punching out?
• Call for a free consultation now.
• You may be entitled to a large cash settlement.
• Get what you deserve-don’t be a victim…
• Call this toll free number now!

These law firms are adding to the hostile IC compliance environment originally created by government.

For years the state and federal governments have been aggressively hunting businesses that utilize independent contractors and contingent workers. The government calls it “providing a level playing field.” Smelling an opportunity, predator law firms have now joined the hunt, greatly increasing the risk to businesses that employee any form of contingent worker-employee or IC.

Why are they successful?

Even the companies that may be correctly classifying their IC’s may not be able to prove it, because they failed to qualify and build a solid compliance file at the time they engaged the consultant. Remember these challenges are almost always about what occurred in the past-often years after the fact. Memories have faded…hiring managers have moved on…etc. These predator firms prevail because most companies are totally unprepared to provide the detail required to win a misclassification law suit.

The predators know most businesses have an Achilles’ heel-failure to properly qualify and document the status of the project and the consultant so they can prove they did it right, even years later.

Effective predators quietly and secretly stalk their prey. By the time they spring the attack it’s usually too late to mount a good defense.

Misclassification suits are filed everyday all across the United States. Most of these legal contests are unknown because they never go to public trial. Most are quietly settled for large cash payments made to the former consultants and to the predator attorneys who represented them. The loser is America’s business community.

Collabrus is in business to protect employers. We work every day to properly classify and pay the contingent workers that our clients need to get their vital work done.

This is a significant increase in the number of NOIs used as an enforcement tool.

In all of FY 2008, ICE issued only a total of 503 NOIs nationwide.

“Since 2009, the Department of Homeland Security has audited more than 2,785 employers suspected of hiring illegal laborers…” said Matthew Chandler, a spokesman for the U.S. Immigration and Customs Agency. 

“ICE is committed to establishing a meaningful I-9 inspection program to promote compliance with the law. This nationwide effort is a first step in ICE’s long-term strategy to address and deter illegal employment,” said Department of Homeland Security Assistant Secretary for ICE John Morton.

It’s a different-less dramatic-enforcement

The ICE auditor is looking at payroll records, possibly the accounts payable ledgers, contract labor records and other disbursements for labor, then comparing the information to the required I 9 forms and supporting documentation. The auditor does not even see, or speak to, the workers-properly documented or not. There are no SWAT uniforms, or gun-toting police-just a single auditor, sitting at a desk, looking at accounting and employment records.

The ICE auditor does not confront the worker eye-to-eye.

It doesn’t matter if the worker is physically located at the business, not working that day, or standing right there next to the ICE auditor during the audit. If the ICE auditor finds undocumented workers, those without properly completed I-9 forms with valid Social Security Numbers on file, several things happen:

• 1. The company is fined.
• 2. The worker is fired (ICE leaves it up to employers to fire workers whose documents cannot be validated. But an employer who fails to do so risks federal prosecution).
• 3. The worker is not arrested or deported, so it is possible they can remain in the U.S. to find another employer.

This tactic is generating revenue.

The audits have resulted in over $3 million in civil fines so far in just 2010.  There have been more than $6.4 million in fines since 2009, according to an ICE spokesperson.

This could be a new avenue for labor law enforcement too.

It doesn’t take much imagination to see the ICE auditor finding other labor law violations and notifying the appropriate agency, such as U.S. Department of Labor, or state labor agencies. (Note: These information sharing agreements already exist!) This has the potential of creating a domino effect that could become very expensive for those employers who willingly or unknowingly ignore labor laws.

• IRS funding for taxpayer education and assistance,
• IRS funding to implement health care reform,
• IRS funding for the new information reporting (Form 1099) for corporations,
• IRS funding for collection practices.

By law the IRS Taxpayer Advocate submits two reports per year to the House Committee on Ways and Means and the Senate Committee on Finance.

1. The mid-year report identifies the objectives of the Office of the Taxpayer Advocate for the next fiscal year.
2. The December 31 report identifies:
   1. The most serious problems encountered by taxpayers,
   2. The most frequently litigated issues in the courts,
   3. Makes administrative and legislative recommendations.

The report says the previous increases in IRS funding went exclusively for compliance activities and there are plans for more compliance funding.

The report states, “…(in recent years) funding for IRS enforcement activities has risen by 17.9 percent while spending for taxpayer service programs has declined by 6.8 percent…(even though) many noncompliant taxpayers are baffled by complex rules…”

The report also states that the current administration’s FY 2011 budget proposal reduces taxpayer services by another 7.2 percent, while increasing enforcement by an additional 13.7 percent.

The report also voices concerns with the IRS’s ability to deliver on its heath care responsibilities.

“I have no doubt the IRS is capable of administering social programs, including health care,” Ms. Olson said. “But Congress must provide sufficient funding and the IRS itself must recognize that the skills and training required to administer social benefit programs are very different from the skills and training that employees of an enforcement agency typically possess. While some enforcement measures are required to prevent inappropriate claims, the overriding objective of agencies that administer social benefit programs is to help as many eligible persons qualify for the benefits as possible.”

This report shows how serious the IRS is about Compliance-you should be too.

IRS funding for compliance is climbing while its funding for education and assistance is dropping. The IRS employs accountants, CPAs, IT experts, criminal investigators, attorneys and others to audit taxpayers, to close loopholes and to identify and prosecute violators. These are full-time experts focused only on one task-compliance.

A part-time IC Compliance effort by a Weekend Warrior isn’t enough to protect you when the IRS knocks on your door and asks you to prove you properly classified your consultants.