Independent Contractor Compliance Blog - by Collabrus™

As long ago as November 2008, I was predicting a crack down on Independent Contractor Compliance, and the broader issue of rampant worker misclassification.

Obama Wins-Tax Loopholes Will Tighten

Then in February 2009, I predicted there was a storm on the horizon-An IC Compliance Storm.

The Perfect IC Compliance Storm is on the Horizon

Almost every week I have provided examples of the approaching storm.  Finally, the traditional media are beginning to catch on…

Last month I told you about a New York Times article, reporting on the crackdown by both the federal and state governments on companies that misclassify workers as independent contractors..

Government Crackdown on Misclassified Workers to Increase: The Perfect Independent Contractor Compliance Storm

More recently, an article appeared in The Boston Globe, informing readers of the crackdown. 

The Boston Globe,

The traditional media are predictably behind the curve.

If you wait to read about it in the newspapers, or see it on television, you are more than likely behind the curve.

It’s 2010 and the Perfect IC Compliance Storm is here.

If you had acted in 2009, you would be worry free today, but it’s never too late to protect your business. To do so you need to act as soon as you recognize you might have a problem. Your best recourse is to hire an industry expert, like Collabrus, that specializes in this issue.

Once the IRS or a state enforcement agency knocks on your door it will be too late.

California’s lawsuit climate is one of the worst in the nation, joining Alabama, Louisiana and West Virginia, according to a U.S. Chamber Institute for Legal Reform report released last week. 

This conclusion was based upon an annual survey asking 1,482 U.S. corporate lawyers, who represent companies with at least $100 million in revenue, to rank cities and states according to how hostile the courts and the legal environment is for employers. According to the report, two-thirds of the corporate lawyers ranked California near the top of the unfriendly list. 

Los Angeles County Superior Courts were considered the second-worst in the nation, behind Chicago. San Francisco was ranked as the sixth-worst in the nation in this survey.

Small to mid-sized businesses are more at risk than their larger counterparts

“California needs more jobs, not more lawsuits,” said Lisa Rickard, president of the U.S. Chamber Institute for Legal Reform, in Los Angeles. “With one of the highest unemployment rates in the country, California’s legal climate is discouraging new businesses and new jobs at a time when the state needs them most…(and) California’s small-business owners are the most affected by lawsuits…”

This is because the small-to-mid-size businesses do not spend the resources to protect themselves either with preventive expertise to avoid the violations from occurring to begin with, or have the resources to pay for top legal representation once a lawsuit is filed.

Larger companies often employ experts (either third party outside experts or full time internal experts) to protect themselves from these predatory lawsuits. In many cases, they can afford to stretch the litigation process out for several years then settle before actually going to trial.  Smaller companies can less afford the prolonged cost and distraction from running their business.

How did we get to this point?

Most businesses don’t want to be bothered with what they perceive as a minor, bothersome issue when they first engage contingent and contract workers. Therefore, they fail to take the proper actions to protect themselves. For example:

1. They don’t use a true expert to advise them on proper classification or on labor law issues.
2. They don’t properly document the working relationship or any actions during the course of the job.
3. They assume they don’t need to provide benefits to anyone they give the title of IC.
4. They don’t properly handle and documentation the end of engagement process.

This is because a new project is a time of excitement and promise. Everyone is happy and the honeymoon is full on. It’s not until later the troubles begin. But later it is too late to go back and do things right.

It doesn’t need to be that way.

You can’t travel back in time and get a “do over.” The time to protect your company is before the lawsuit is filed. The best way to protect your company is to engage an industry expert like Collabrus to make sure your contingent workers are properly classified.

When last I reported this Nebraska proposal it was just a bill-now it’s a law!

Nebraska’s governor signed into law new legislation that cracks down on employee misclassification. A press release indicated that Nebraska plans to initially target the construction and trucking industries that have a history of misclassifying workers. However, such laws apply to all employers.

This is one of the toughest misclassification laws in the nation.

The law allows the state to fine employers $500 per day for the first misclassification, then $5,000 per day for each additional employee misclassified. These fines are in addition to any payroll and income taxes, interest and other penalties assessed, or possible criminal violations (see below).  It doesn’t take much imagination to visualize such fines shutting down a company.

Politicians, bureaucrats and unions say it’s about “leveling the playing field.” However, it’s really about generating revenue during tough economic times.

I’ve reported numerous times that politicians like to look as if they are taking the high ground when increasing tax collections. The most common cliché used at both state and federal levels today when increasing revenue collection with tougher IC compliance is “leveling the playing field.” Nebraska is no exception.

The “leveling the playing field” argument goes like this:

Employers that misclassify workers can avoid 30% of payroll costs, giving them an unfair advantage in bidding for jobs and in profit making. This unfair advantage drives honest, tax paying employers out of business. We must level the playing field so all employers are on equal footing in competing for business.

To prove my point: Nebraska State Senator Steve Lathrop, who introduced the bill, said the measure is mainly “about leveling the playing field so the honest contractor(s)…can compete with the person who is misclassifying employees…”

The more revenue argument goes like this:

• A government press release cited Nebraska State analysts’ estimates that misclassifying employees in the construction and trucking industries alone causes the state to miss out on about $5 million in tax revenue each year.
• The Teamsters Union praised the new Nebraska law, but believes misclassification cost the state between $9 million and $18 million a year in additional tax revenue.

The law encourages workers to report misclassifications and provides for sharing information with law enforcement.

The law establishes a phone hot line and website administered by Nebraska’s Department of Labor for workers and competing companies to report suspected violations. The department will investigate complaints and share results of the investigation with Nebraska’s Department of Revenue for possible assessment of unpaid taxes. The law also allows for sharing information with law enforcement to investigate other violations.

The Perfect IC Compliance Storm

This is only the latest example of the IC Perfect Compliance Storm that is sweeping across the nation. You need to get your ship in order before the storm hits you. Collabrus can help!

As further evidence of the Federal Government’s stepped up interest in closing the “tax gap” caused by employee misclassification, a new federal bill to get tough on companies that misclassify employees as independent contractors was introduced last Thursday, April 22, 2010, by U.S. Sen. Sherrod Brown (D-OH) and U.S. Rep. Lynn Woolsey (D-CA).

The “Employee Misclassification and Prevention Act” would require employers to keep records on the status of each worker and increase penalties on employers who misclassify workers, according to Sherrod’s office. It would also create an “employee rights Web site” to inform workers about their rights and it would create protections for workers discriminated against because they sought accurate classification.

The bill also would require states to conduct audits to identify misclassification, and to strengthen their own penalties for misclassification. In addition, the bill would allow the Department of Labor and IRS to refer incidents of misclassification to one another and direct states.

Also, the Department of Labor would be directed to conduct targeted audits of industries that frequently misclassify workers.

Brown cited a study by the Ohio Attorney General that Ohio loses at least $160 million a year because of worker misclassification.

U.S. Secretary of Labor Hilda Solis lauded the bill, and said her department is already addressing the issue of misclassification. “The Department of Labor is working with the Vice President’s Middle Class Task Force and the Department of Treasury on a multi-agency initiative to develop strategies to address this issue,” Solis said in a press release. “The administration’s budget request for fiscal year 2011 includes $25 million for the Department of Labor as part of this initiative, including $12 million for increased enforcement of wage and overtime laws in cases where employees have been misclassified. The Wage and Hour Division is currently considering how to best target its FY 2011 enforcement efforts and is emphasizing misclassification in its ongoing FY 2010 enforcement strategy.”

We’re entering a new era, one where employers simply cannot run the risk independent contractors who are misclassified as employees. It is a complex issue, one that is becoming more challenging and dangerous with each new piece of legislation. The safest and most cost-effective way to address this problem is to engage a proven industry expert, like Collabrus, that brings expertise and tested compliance solutions to your company.

In an article posted on April 6, 2010, I informed you of this tax credit and how to qualify.

The Health Care Bill Provides a Conditional Credit for Small Employers

You can find a complete synopsis of this tax credit in that article. 

This week state and federal government agencies began to officially announce this tax credit.

The IRS is offering substantially the same information (albeit in a different format) on its website.

http://www.irs.gov/newsroom/article/0,,id=220809,00.html?portlet=6

As part of its outreach effort the IRS announces it is sending businesses a Postcard

The IRS announced that it is sending millions of small businesses postcards to alert them to the new Small Business Health Care Tax Credit and encourage them to check their eligibility.

At Collabrus we’re always a little ahead of the curve for our clients!

The already huge U.S. Department of Labor (DOL) is asking Congress for $116.5 billion in funding and 17,800 full-time employees for fiscal year 2011 budget. During a recent budget hearing, (conducted by the House Appropriations Committee’s Subcommittee on Labor, Health and Human Services, Education and Related Agencies) Labor Secretary Hilda Solis testified that in addition to its regular enforcement efforts the agency intends to use these funds to get tougher on employee misclassifications (this is the common practice of misclassifying a worker as an independent contractor when, in fact, they should have been classified as an employee).

How much does DOL want to spend on enforcing IC compliance?

Secretary Solis testified that $1.7 billion in discretionary funds and 10,957 full-time equivalent employees would be devoted to worker protection activities to identify and deter instances of employee misclassification as independent contractors.

Including:

• $25 million to create a multi-agency program to coordinate federal and state efforts on misclassification enforcement,
• Hire an additional 100 investigators to target misclassified workers in a joint initiative with the Department of the Treasury (IRS).
• $12 million and 90 new investigators to expand the enforcement efforts of DOL’s Wage and Hour Division (WHD).
• Another $244.2 million for the WHD would go for targeted investigations and compliance assistance. It would also be used to identify violations of minimum wage, overtime, and workplace safety laws.
• $10.9 million to recoup unpaid payroll taxes through state audits.
• Prosecuting employers that fail to pay the appropriate taxes due to worker misclassification.
• $1.6 million to the Office of the Solicitor to hire 10 full-time equivalent employees and to enhance enforcement strategies.
• $150 thousand to the Occupational Safety and Health Administration (OSHA) to train inspectors on worker misclassification issues.

The Secretary’s testimony is just another indicator of the major shift in focus and resources towards employee misclassification enforcement by the Obama administration.

Increased IC compliance enforcement is a major cornerstone of the new federal tax enforcement and revenue collection model. I believe the federal government’s goal is to insure misclassified workers and those not already on the wage earner’s radar are identified and placed in The System. It all ties in with 1099 reporting for IC’s, efforts to get withholding on 1099 payments, repealing the IRS Safe Harbor section and other proposals that have been recently introduced. 

(You may read about all of these on this blog site)

Don’t wait until you have been targeted. A dollar spent in insuring you are protected today could save your company many times that in the near future.

Regular readers of this blog might think I’m “The boy who cried wolf,” or perhaps Chicken Little-always crying “The sky is falling”!

I write article after article warning you that enforcement of the independent contractor classifications is toughing up on both the local and national levels. I’ve been calling it the Perfect Compliance Storm for some time. I advise you to protect your company now because it is too late after the enforcement agency knock on your door. You think, “So far nobody’s knocked on my corporate door so he must be wrong”-right?

To make my point here are just a few excerpts from recent government press releases and current websites…

In California:

1. California’s Department of Industrial Relations’ (DIR) website boasts of its creation of the Economic and Employment Enforcement Coalition (EEEC), defined as, “a partnership of state and federal agencies…collaborating to…educating….and conducting vigorous and targeted enforcement against labor law violators; and helping to level the playing field (a political cliché for increased compliance and revenue collection)…and restore the competitive advantage to law-abiding businesses and their employees.

The website goes on to say, “California needs stronger enforcement of the current labor laws.” Even though the website boasts, “For decades California has had some of the strongest labor and workforce safety laws in the country…”

1. California’s Employment Development Department (EDD) website on misclassified workers states, “The state of our current economy makes it more important than ever to combat underground economies and provide a level playing field for California businesses (that cliché again).

In New York:

1. New York’s State Department of Labor website advises individuals, “If you think an employer is committing fraud by misclassifying its workers or is committing violations of New York State laws related to the employment of workers, it is important that you let us know about it.”  In a public hearing in January of this year the Chairman of New York’s Senate Labor Committee, George Onorato, D-Queens, said, “The Senate committee is here to begin to tackle a problem that has been around for a long time in our state, (employee misclassification)…businesses that follow the rules are placed at an unfair advantage…” (sounds like he wants to level the playing field).  In replying to the idea of cutting any resources involved in investigating misclassification violations he said, “They make money for us…People are going to start realizing that they can get away with (misclassification if we cut resources)…”

At the federal level:

1. In a press release issued last month the Obama administration announced that it has, “directed both the Treasury Department (IRS) and the Department of Labor to increase enforcement on companies that treat workers as independent contractors when their job duties are actually those of an employee.”  The IRS has received an additional 4500 agents and the Department of Labor received an additional 100 investigators to support this effort.
2. The IRS announced it will conduct 6000 employment tax audits in 2010 as a pilot to determine the extent of non-compliance.
3. This past month, Senator John Kerry, D-Massachusetts, and Representative Jim McDermott, D-Washington, have both introduced almost identical bills that would greatly limit the current provisions of the Section 530 Safe Harbor and increase penalties against companies who misclassify workers.
4. Commenting on those bills President Obama said he wants even stronger action to strengthen IC compliance.  In a press release issued in February 2010, he has specifically asked Congress to enact tougher worker misclassification laws.

The examples go on and on and can be found in almost every state. The point is, you need to put your compliance house in order before they come knocking on your door. It’s too late after these forces have aligned against you…

Many new clients begin working with Collabrus by having us conduct an internal assessment of their current contingent workforce. This exercise is very similar to a government agency audit, except for our objective is to find and fix any problems with misclassified workers, NOT issue a tax bill and penalties!

The two thousand plus page Health Care and Reconciliation Bills are complex and rich with provisions that will take time to be fully discovered. Many of the provisions create additional costs. For example, the law requires employers to provide health insurance for their employees or face harsh penalties. However, the law also provides some opportunities for your company to save money.

For example, effective for tax years beginning after December 31, 2009, the bill allows employers (with 25 or less employees) to receive a tax credit against the health insurance premiums. To read more about this provision see my recent article entitled, “Health Care Bill provides a conditional credit for small employers.”

Can this provision apply to you if you have more than 25 employees?

Possibly-there are two ways that I can see to do this, but one is very risky.

They are:

1. Make those who would push your company over the 25 employee limit independent contractors.
2. Use a contingent workforce services company, such as Collabrus, to employ your temporary workers so they do not count against your 25 employee limit.

Let’s look at each of these options:

Option 1-Make them all Independent Contractors

In this option, you make anyone who would push you over the 25 employee limit an IC. If they aren’t an employee they don’t count towards the limit. So under this option you have 25 (or less) admitted employees and would claim the credit, because you made everyone else an IC.

This is a very risky option, since it will almost certainly lead to an IRS and state audit with taxes assessments, penalties and fines. In addition, if the IRS decides you were being fraudulent in classifying these workers as IC’s for the purpose of receiving a tax credit the consequences could be very serious. The IRS and local tax agencies are stepping up their IC compliance efforts to generate more revenues and to get all Americans (employee or IC) on their tax radar scope (see my recent articles on these topics). This option would be waving a red flag at a very dangerous time. You can not just magically re-title you employees and make them independent contractors. I do not recommend this option.

Option 2-Use a company, such as Collabrus, to legally employ your temporary staff and validate your IC’s.

Under this option you engage a reputable company such as Collabrus to properly classify and employ all of your contingent workers so they legally and honestly become Collabrus’ employees, assigned to provide services for your company.  We can also help mitigate the risk of IC misclassifications from an IRS or a state enforcement agency challenge.

When done correctly this option allows you to keep your number of employees at 25 or under, so you may claim the small employer credit.

Under this option:

• Your contingent workers would become Collabrus employees.
• Collabrus would properly withhold, pay taxes on and report these employees as its own.
• Collabrus would provide a superior employee package that includes qualifying health care, 401(k) retirement plan and other benefits.
• Collabrus would help you properly classify your IC’s so they are correctly and legally classified.
• If you wish, we can even administer the IC’s contracts through our state of the art management information, tracking and reporting system.
• If a consultant does not qualify as an IC under state and federal rules, then we can put them on our payroll as an employee.

Act now

With option 2 you can have your workers and a tax credit too. Don’t waste time.  The tax credit for small employers is effective for tax years beginning after December 31, 2009. The requirement to provide health insurance is law and so is the tax credit if you qualify. Take advantage of both today.

The two thousand plus page Health Care and Reconciliation Bills are complex and rich with provisions that will take time to be fully discovered. In this article I’ll explore some of the new taxes, fines and penalty provisions that affect employers and their workers. Many of the provisions do not take effect immediately, but are phased in during the next decade.

Effective for the tax year 2013 there will be higher taxes for households with income above $250,000 and individuals above $200,000:

• Medicare payroll tax on earnings above those amounts will rise from 1.45 percent to 2.35 percent (employer withholding from employee’s wages required).
• Unearned income above those amounts, such as dividends, will be subject to a 3.8 percent tax (paid on personal income tax returns).

Also in 2013, maximum contributions to pre-tax Flexible Savings Account contributions will be limited to $2,500 a year (down from the current $3,050 for individuals). This will be another change for employers with these programs.

Effective for the tax year 2014 most people will be required to buy insurance coverage or pay penalties. The penalties start at $95 in 2014 and rise to $695 or 2.5 percent of income (whichever is greater) in 2016. I believe the mechanics of how this penalty will be collected have yet to be designed. However, this requirement will affect employers if their employees meet this requirement by obtaining their insurance from an exchange (keep reading for more details on this).

Also effective in 2014 if an employer has 51 or more full-time employees and does not offer coverage but at least one full-time employee gets an exchange credit, the employer is penalized $2,000 per employee. (The first 30 workers are exempted from the payment calculation).

For example:  For an employer with 100 workers the penalty will be (100 minus 30) or, 70 x $2,000 = $140,000.

If an employer has 51 or more full-time employees and offers coverage, but at least one full-time employee gets an exchange credit, the employer is penalized the lesser of $2,000 per employee (no 30-worker exemption) or $3,000 per credit receiving employee.

For example: If an employer with 75 workers offers insurance but 10 workers receive exchange credits, the firm would pay the lesser of either 75 x $2,000 = $150,000, or 10 x $3,000 = $30,000. In this case the employer would pay $30,000.

Effective for the tax year 2018 there will be a 40% tax on the premiums of high-end employer plans costing $10,200 for an individual plan or $27,500 for a family plan. This has been referred to as the “Excise Tax on Cadillac Plans.”

The thresholds will be set higher for retirees who are at least age 55 but not yet eligible for Medicare and for employees in certain high-risk professions, such as firefighting, law enforcement, construction, agriculture, and mining.

The tax would be levied on a non-deductible basis against the insurance companies or insurance administrators. However most agree the cost will, in some way, be passed along to employers or to their covered employees.

Who enforces the provisions of the Health Care Bill?

The IRS; for example:

• The IRS will be responsible to verify if companies have a qualifying plan.
• The IRS will be responsible for assessing and collecting all taxes, fines and penalties.
• The penalties for not purchasing Health Care Insurance will be included in the individual and business tax returns, as appropriate.
• Tax credits will be administered through business and individual tax returns.

Beware! This scrutiny could easily lead to increased IRS enforcement in other areas.

It is expected the IRS will receive increased funding to hire additional auditors, agents and other staff to administer this program. The exact number is not known at this time. Be forewarned: In my experience once an agency (like the IRS) begins looking at your business it doesn’t restrict itself to just the initial issue. One thing can lead to another and soon you may very well find yourself in the middle of an employment tax audit.

These provisions are complex and apply to both your regular, full-time employees and to your part-time and contingent workers.

With the passage of this new law it is becoming too costly to take risks and come out on the wrong side. It may be time to explore alternatives for your contingent workforce and time to make sure you are in compliance. Collabrus can help!

WASHINGTON DC-The IRS announced two new tax benefits available to employers hiring workers who were previously unemployed or only working part time. These provisions are part of the Hiring Incentives to Restore Employment (HIRE) Act enacted into law last week.

The first tax credit

Employers who hire unemployed workers this year (after Feb. 3, 2010 and before Jan. 1, 2011) can qualify for a 6.2-percent payroll tax incentive, as an offset from their share of Social Security taxes on wages paid to these workers. This reduced tax withholding will have no effect on the employee’s future Social Security benefits. Employers will still be required to pay their share of Medicare taxes.

The employees must still pay all their share of taxes

Employers are still required to withhold from the employee’s wages:

• The employee’s 6.2-percent share of Social Security taxes,
• Medicare,
• Personal income taxes.

The second tax credit

In addition, for each worker retained for at least a year businesses may claim an additional general business tax credit (up to $1,000 per worker) when they file their 2011 income tax returns.

The credits are designed to get businesses to expand the number of employees they have.

“These tax breaks offer a much-needed boost to employers willing to expand their payrolls, and businesses and nonprofits should keep these benefits in mind as they plan for the year ahead,” said IRS Commissioner Doug Shulman.

Who qualifies?

Commercial businesses, agricultural employers, tax-exempt organizations and public colleges and universities all qualify to claim the payroll tax benefit for eligible newly-hired employees.

Household employers cannot claim this tax benefit.

There are some conditions to qualify

To qualify for the tax benefits:

• The new hire must be an added position to the payroll.
• New hires filling existing positions only qualify if the workers they are replacing left voluntarily or were terminated for good cause.
• Family members and other relatives do not qualify.
• The employer must get a statement from each eligible new hire certifying that he or she was unemployed during the 60 days before beginning work, or worked less than a total of 40 hours for someone else during the 60-day period.

(The IRS reports it is developing a form for employees to use to make the required statement).

How will the credit be claimed?

Employers will claim the payroll tax benefit on the federal quarterly employment tax return they file with the IRS beginning the second quarter of 2010. The IRS states that revised forms and further details on these two new tax provisions will be coming in the next few weeks.