Independent Contractor Compliance Blog

The universally known facts of today can become the lost, arcane knowledge of tomorrow.

Memories fade and change over time. The common knowledge of today becomes lost as people move on and are involved in other projects. Sometimes records are even lost.  However, legal challenges, requiring detailed recall of facts and events, can occur several years after a project ends; which is why you should not only document the beginning, but also the end of the IC engagement, while the facts and circumstances are fresh in everyone’s mind.

Challenges can come from either the government or from the consultant.

It is becoming more common for consultants to bring civil lawsuits against their former clients because they believe they were not treated well. Also, both state and federal governments are hungry for money and are finding misclassified workers the new mother lode for increasing revenues. They call it “Leveling the playing field,” or sometimes “Closing the tax gap.”

Federal or state audits can hit you years after the project closes down.

Where many civil lawsuits must be filed within a year of the alleged damages, the state and federal statute of limitations is generally three years for worker misclassification issues. If the auditor believes there was intentional disregard or fraud, the time limits can be indefinite. 

The fallout from a worker misclassification audit can be expensive.

For example:

• The auditor doesn’t just scrutinize the consultant that sparked the audit, but will expand the scope to look at every IC that has performed services for the company within the statutory period (usually three years).
• The auditor will issue a tax assessment (with penalties and interest) for all consultants found misclassified, creating a liability many times the original cost had they been handled as employees.
• The audit results are also shared with other federal and state enforcement agencies. Soon these other agencies are standing in line to audit the company.
• These events cannot be kept secret from the workers-current or former. Many times, when consultants learn the government has determined them to be misclassified, they join together and file class action suits for past overtime and other employee benefits.

How do you protect yourself from this nightmare?

These events can be very expensive and time consuming. However, being able to produce the proper documentation, preserved at the time the project was alive and well, can often make all the difference between a successful defense and paying out a large, unplanned settlement for either a government audit or a civil lawsuit.

Your IC project file should contain:

• The contract.
• A clear description of the project.
• Evidence the contractor was reviewed and qualified as an IC.
• Evidence the project qualified for IC status (NOTE: This is different from the IC qualifying).
• Evidence the consultant was holding himself to be an IC when he provided you the service.
• Evidence the deliverables specified in the contract were successfully delivered and final payment was made in full.
• The details of the successful end of the project.  For example:
  • The project ended because the contract was fulfilled, not for lack of work or a budget cut.
  • If the consultant was terminated before the scheduled end date-why?

The documentation process should be efficient, automatic and continuing from the first day until the project ends.

Leveraging our years of experience in performing IC Compliance Evaluations for our clients Collabrus has developed an easy and efficient Compliance File process that starts before the consultant begins working, continues throughout the life of the project, captures the end of project environment, and then is preserved. Just in case.

Washington DC-Recently IRS Commissioner Doug Shulman spoke at the National Press Club about his vision of the IRS in the future. I think his vision provides some interesting insights into how the IRS looks at compliance-not only income tax but also misclassifications and employment taxes.

Shulman is expecting the IRS to receive more money to beef up its compliance technology.

He stated, “In all honesty, there was an under-investment in IRS technology over the past 20 years which left us in a very deep hole. (However) starting with the President’s 2011 budget proposals the trend has been reversed…”

How Shulman describes the current compliance process.

He stated, “…the compliance side of our operations is largely predicated on looking back…Sophisticated risk models help IRS staff identify returns that are most likely to show compliance problems…the process is far from random. The IRS uses the cumulative knowledge and data over many years to model the risk of tax avoidance, and using these models we target our activities as precisely as we can. We then follow up with the taxpayer to…determine whether the return was accurate….An IRS audit often occurs years after the return was filed.”

Shulman’s vision is the IRS of the future will enforce compliance up-front – before the return is filed.

Commissioner Shulman states, “(his) vision is relatively straightforward. The IRS would get all information returns from third parties (W2s, 1099s, etc) before individual taxpayers filed their returns. Taxpayers or their professional return preparers could then access that information, via the Web, and download it into their returns, using commercial tax software. Taxpayers would then add any self-reported and supplemental information to their returns, and file the returns with us. We would embed this core third-party information into our pre-screening filters, and would immediately reject any return that did not match up with our records.”

According to Shulman, “Any discrepancies that taxpayers see between the information as reported to the IRS, and their own records could be resolved before filing the tax return, when the records are fresh…and also fresh in their mind. Taxpayers get it right the first time, with no risk of getting a letter about the mismatch later…and no risk of interest and penalties.”

The IRS would receive the information before the taxpayers.

He states, “This (the above vision) would require that the IRS get information returns, like 1099s, into the system earlier…Dates like February 28, the due date for 1099 returns…(would need to be changed).”

He implies the IRS would need to receive the information before the taxpayers do, requiring businesses and employers to send the information to the IRS and the taxpayers receiving wage and income information from the IRS.  If there were an accounting error in the information return, correcting it could become very difficult.

Would he eliminate tax audits by the IRS?

Commissioner Shulman answered that question by saying, “…of course, there will still be a need for audits and other types of after-the-fact compliance work to make sure that our overall level of voluntary compliance remains high.”

How likely is this to occur?

Oftentimes, government agencies, like the IRS, run new ideas “Up the Flagpole” to assess public reaction before officially trying to implement it. This is most likely what Commissioner Shulman is doing with his new vision. The probability of this becoming reality depends on the public’s reaction and subsequent funding by congress.

This question was asked at a recent Collabrus seminar in San Francisco by an HR person, not an expert on legal entities and IRS reporting requirements.

“It depends on how the LLC is organized and reports to the IRS,” I responded.

“I don’t understand-it’s an LLC. That’s how it’s organized,” she said.

I continued, “Maybe I should back up. LLC means Limited Liability Company. A common misconception is that LLC means Limited Liability Corporation. An LLC is not automatically a corporation.”

“Then how is it treated?” she asked.

“LLC’s can be organized as corporations, but also as sole proprietorships, partnerships or some other less common legal entities. Depending on how they are organized there are different requirements, so you treat an LLC based on how it is organized and files with the IRS.”

A different participant then asked, “How can I know that?”

“Have your consultants complete a W 9. The form requires the type of legal entity they are, their tax ID number, and other information you may need later,” I answered.

“So does a LLC organized as a corporation require a 1099?” a third participant asked.

“If the LLC is organized as a corporation it will most likely not require a 1099. I paused for a moment then added, “But there’s an exception.” (I got a few chuckles with that statement). “Let me explain…”

I clicked to a backup slide-not part of the regular presentation. The slide looks something like this:

I continued, “So if the LLC is organized as a sole proprietorship or a partnership, for example, then you need to issue a Form 1099-MISC. Corporations are generally exempt from receiving 1099′s. The exception is if you pay an attorney $600 or more for business related legal services, not personal legal services. So even if your business attorney is incorporated, you must file a Form 1099-MISC to report the payments.”

We then went on to a new topic: Events that will get you audited or investigated by the IRS and the State of California for worker misclassification…A very popular topic at Collabrus seminars, and the subject of a future blog article!

I hope you don’t hold it against me, but in a previous life I was a tax auditor for the government.

As a rank and file auditor I performed approximately 800 audits before becoming a supervisor, then a district administrator and on up the line…From that experience I can tell you firsthand that auditors look for the easy to find clues during the audit. They harvest the “low hanging fruit” by recognizing certain patterns typically found in businesses that misclassify their workers.

What are some of these patterns?*

• One of the early accounting tasks an auditor performs is to inspect the general disbursements journal or check register. The auditor is looking for regular, recurring payments to individuals with no DBA or corporate name. The longer the payments continue the lower the fruit becomes. If the payments are substantial and paid every two weeks for a long period of time, the auditor will suspect an exclusive relationship, pointing to the possibility the consultant has no other clients. This becomes the first “potentially misclassified employee” clue.
• The auditor also compares the names on the regular payroll to the names in general disbursements, contractor payments or other ledger accounts. Employees who receive payments as IC’s become another fruit to pick. Auditors find it difficult to believe your employee may also be your IC. It is possible for an employee to have a side business and perform work as your IC, but the auditor knows there’s a narrow range of tolerance for this scenario and most of the time your employee/consultant won’t qualify.
• The auditor discovers a consultant is doing substantially the same kind of work your employees perform. Many times the auditor learns the work is in the regular line of the company’s business-what your company does-another easy picking…
• The auditor looks in the disbursements journal or expense ledger and discovers these consultants are being reimbursed for expenses. Employees are reimbursed for expenses. Independent contractors pay their own expenses. A consultant who is reimbursed for expenses looks more like an employee. (At this point the auditor is asking more questions about these contractors and will probably talk directly to the consultants).
• The auditor may learn that you provide business cards, or other supplies, and that you provide the workspace, tools or equipment needed to perform the work. These are further examples typically associated with employees.

So during a brief inspection of your accounting records and a few conversations with you, and maybe a consultant or two, the auditor has harvested the following information:

• There are consultants performing the same or similar services as the employees
• The work is in line with your company’s regular business
• They work for an extended period of time, on a regular basis
• They work on an exclusive basis (most probably have no other clients)
• They do not have their own established business
• They are paid on a regular basis like employees are paid
• They are reimbursed for expenses
• They are provided with the supplies, tools and workspace to perform the work
• Some of them may be “admitted employees” who are also being paid as IC’s

At this point it’s only a matter of time before you receive a tax assessment in the mail.

This nightmare scenario can be avoided, if you protect yourself before the auditor knocks on your door.

The real protection comes from properly qualifying and documenting your consultants and projects prior to and during the life of the engagement. A small, upfront investment could save you many times that amount in the future.

*Remember, no single factor will decide the status of an individual. The total picture must be considered and each factor must be properly weighed in light of the profession and the project to determine if someone is appropriately classified as an employee or an independent contractor. It takes an experienced and knowledgeable professional to make defensible common law determinations on worker status. This is one of the valuable services that Collabrus provides to our corporate clients.

One of the most common misconceptions about worker classification that I encounter with clients is the belief that a written contract defining the relationship with a consultant as that of an independent contractor, responsible for his own taxes, will protect the company from misclassification challenges by either tax agencies, labor law disputes, or in civil matters.

Clients and consultants often argue that, “if you call yourself an Independent Contractor then that’s what you are and the government has no right to challenge that decision…”

Unfortunately, this is just not so.

A written contract is not the magic IC Bullet.

If a written contract defining the relationship as an independent contractor could not be challenged, there would never be any misclassified workers. Everyone could be an IC by signing a contract. This is obviously not the case.

The intent of the parties is only one factor.

How the parties define their relationship in a written contract is given minor weight in the final decision. The courts have consistently held that a written contract only shows the intent of the parties and does not determine the actual working relationship and status of a worker. 

In the now famous case of Vizcaino v. Microsoft, the 9^th Circuit Court of Appeals held that Microsoft’s temporary workers were common law employees despite the fact that they signed written contracts agreeing that they were independent contractors.

FedEx Ground had written IC agreements with its drivers, but California courts have consistently held their drivers are common law employees [Estrada v. FedEx Ground Package Sys. Inc., 64 Cal. Rptr. 3d 327 (2007)].

In Martin V. Phillips Petroleum, (1974, Cal. Appl decision) the court stated, “A contract cannot affect the true relationship of the parties to it, nor can it place an employee in a different position from that he actually held…”

As far back as 1917, courts were saying, “A contractual provision that a workman is an independent contractor is persuasive evidence of the intended relationship, but is not controlling and the legal relationship may be governed by the subsequent conduct of the parties.” (Brown V. Industrial Accident Commission, 1917, 174 Cal. 457)

The decisions go on and on-all acknowledging a written agreement exists then setting it aside to determine how the day-to-day relationship actually worked.

State and Federal Tax Auditors are trained that since the government did not sign the contract it is not binding on the government-law always takes precedence over a private contract.

Government auditors are trained that workers are often required to sign IC agreements before they can work for a principle, and that “If they wish to work they must sign the agreement…”

Government auditors are also told, “These are Adhesion Contracts….They are to be set aside and the actual facts of the day-to-day working relationship must be determined.”

Be sure your consultants and contractors are IC’s in more than just a title.

Don’t just bestow the IC title on part-time or temporary workers. A good IC contract sets out detailed provisions describing the IC working relationship. Be sure to follow the provisions in the contract.  

Most companies engage an attorney to set up a legitimate IC agreement, which clearly defines an IC relationship. However, it is common for the consultant and client company to sign the agreement and then forget about it. From that point forward the consultant is treated almost like any other employee in the company. The perfectly constructed IC agreement becomes almost worthless if it is not followed and unless the actual day-to-day working relationship supports a true independent contractor.

One more pitfall.

I’ve seen some contracts that do not cover all of the necessary common law elements. These contracts may not be sufficient to protect you even if you follow them to the letter. This is where someone who truly understands common law can help you: someone to set up the proper day-to-day working relationship, and document it so later you can prove you did it right.

Remember, it isn’t what you call it, but how it actually works that is important.

“A rose by any other name, still smells the same…”

(Shakespeare, please forgive me for misquoting you).

If your managers do not use and support your Independent Contractor (IC) qualification system, no matter how good it is, it won’t be effective, and your company will be at risk for misclassified workers.

Many project managers think it’s too much trouble to qualify a consultant-that it’ll slow the progress of the project and cost too much money.

If the project manager doesn’t support the qualification process he or she may think, “I’ll simply make an end run.” It is common for new clients to tell us, “We have a system to qualify contractors but our project managers think it is burdensome and slows down the implementation of the project, so typically they hire a consultant, negotiate the rate, the duration, the deliverables and all the other elements of the engagement before ever checking with HR or anyone else…by the time we learn about it the worker has already started and it’s too late to do anything about it.”

At that point the company hopes there is never a misclassification issue. The company is gambling at a high risk. The hiring manager has made a risk management decision that could put the company at great financial risk. This is totally the wrong way to engage consultants.

The Right Way…

In my public seminars, and when I help Collabrus clients, I show them a process that insures proper classification without creating a barrier to the project. Here is an outline of the process:

1. Establish the project (know what you intend to accomplish, the deliverables and time frames).
2. Estimate the budget (but don’t finalize it yet).
3. Select and qualify the consultant and project for IC or for employee. Yes, it’s not only the consultant who must qualify as an Independent Contractor, but how the project is run (working relationship) that is very important in determining a consultant’s status.
4. Finalize budget after the consultant qualifies as an IC or employee (IC’s and employees have different costs).
5. Insure documentation is preserved in a compliance file so that in the event of an audit you can prove you made the correct classification. This is very important since challenges almost always occur later, after the project is over, after the consultant is gone, and after memories have faded.

If you follow this plan, the work can start with no worry about misclassification in a very short time. Your managers soon discover that they can do it right and do it fast, so an IC qualification will not impede the implementation of a vital project or put your company at risk.

At Collabrus we have a proprietary process that mitigates your risk and is accurate, fast and easy. We have a commitment to give you the right answer, in writing, within one working day of receiving the necessary information to make the IC qualification.

Do you want to ensure protection against a misclassification challenge? In the eyes of an auditor, even if you made the proper call on the classification, if it isn’t properly documented it is open to interpretation.

One of the ways Collabrus protects you and your high-end consultants is our proven system of documentation for your projects and contractors. We begin this detailed, but easy and efficient, process before the consultant even begins working and continue it throughout the life of the project, including capturing the end-of-project environment for a final measure of protection. This rigorous proprietary process will help protect your company from the very real risks and costs of misclassifying your consultants.

Why is the “before, during and ending” documentation process so important?

• Challenges are almost always in the past. Typically when a government tax auditor knocks on your door, or you are challenged by a civil class-action suit, you might be required to prove today that you properly classified and utilized a worker several years ago. It is very difficult, and expensive, to reconstruct evidence retroactively.
• Memories fade. The level of detail required to prove you made the correct call on a worker misclassification case can be staggering. Reconstructing the proper evidence, at the necessary level of detail, two or three years after the fact is very difficult and sometimes impossible.
• Project sponsors and managers may be gone. If you are depending on the project manager to know everything, what are you going to do if he or she has moved on to another company and is not available?
• The contractor is not working for you any longer. Oftentimes, the contractor is not with you any longer, and sometimes he/she may be sitting on the other side of the table testifying against you-they might possibly the person bringing the action. In these cases, the ex-contractor is now hostile and oftentimes recalling a different reality than the one you remember. Who will the judge believe? It depends on credibility, but if both sides are equally credible, generally the courts rule on the “employee” side. So you must enhance your credibility with documentation that was created at the time the project was active and going well.
• The burden of proof is on your company to prove proper worker classification. The government only needs to assert you misclassified a worker and by law the burden of proof falls on you to prove you did it right.
• Finally, requiring documentation helps you properly qualify the consultant. Preparing the proper documentation also takes you through the proper qualification process. It reminds your managers they need to follow the rules and do it right. A good system is easy and efficient and insures you have made the right decision (and can prove it) before the work begins.

A misclassification challenge isn’t something you should wait to prepare for until after it happens.

Don’t be left standing (or sitting) alone with a tax auditor, or possibly a hostile attorney, who is asking what this project was about, and about the details of the day-to-day working relationship between your company and a former consultant from several years ago. Misclassification conflicts are too costly to depend on your memory and a dusty boilerplate IC contract as a defense.

WASHINGTON-The US Internal Revenue Service recently released statistics describing IRS activities from Oct. 1, 2009, to Sept. 30, 2010. The release includes information about returns filed, tax collections, enforcement and taxpayer assistance, as well as the IRS budget and workforce.

Some IRS statistics for FY 2009-10:

• Collected $2.3 trillion in revenue
• Processed 230 million returns
• Over 119 million individual income tax return filers received a tax refund, totaling $358 billion
• Audited/examined over than 1.5 million individual income tax returns
• Approximately 90,000 corporations, of all types, audited/examined
• Audited/examined approximately 30,000 employers for employment taxes
• Of those audited/examined for employment taxes, 3,714 apparently did not concur with the audit findings
• Out of all the employment tax business audits, 455 of them resulted in a refund for employment taxes totaling $43,492

How many IRS employees are there?

According to the report, the IRS began the fiscal year with a total of 92,577 employees.  It ended the year with 94,349 employees. Of these:

• 14,588 were Revenue Agents
• 5,922 were Revenue Officers
• 2,751 were Special Agents
• 1,610 were Attorneys

You could go blind trying to decipher this data as presented in the release; however, if you have the time you can browse through the IRS 2010 IRS Data Book for yourself to find more details.

What we should take away from this is the IRS is still alive and active, but there are more compliance hurdles than just the IRS…

In addition to the IRS, there are numerous other federal and state enforcement agencies looking over your shoulder, with their regulations and laws. For example:

• There is a 12-factor test that determines whether a worker is an employee or independent contractor under ERISA, for the purpose of the federal law governing employee benefits.
• The Equal Employment Opportunity Commission (EEOC) applies a test based on the “right to control the means and manner of worker’s performance” for federal employment discrimination law enforcement.
• The Fair Labor Standards Act (FLSA) applies an “economic realities” test including six factors to determine whether the worker is economically dependent on the business (and therefore an employee subject to FLSA) for wage and hour protections.
• The Immigration Reform and Control Act (IRCA) applies a 7-factor test to determine a worker’s immigration status.
• In addition, each state has its own unique set of employment security and labor laws to follow.

All these agencies employ experts who specialize in just their area of the law. Don’t rely on someone who has a bag full of other responsibilities to protect your company from them. You need a true expert, like Collabrus, on your side.

Whenever a consultant who doesn’t qualify for independent contractor status, is pushing back, arguing to be treated as an IC “or else,” I wonder if they have truly thought this through?

First, let me begin by stating that this does not apply to the consultants who have clearly established their own business, serve multiple clients and meet the qualification tests as an independent contractor. Those individuals are a valuable part of our economy and provide a critically needed service to other businesses.

I’m addressing those individuals who are just working under the radar, not meeting the federal or state tests of an IC and in all honesty are performing services as a misclassified employee. Oftentimes these individuals are the ones who dig their heels in when, after an expert review of the facts, are informed they do not qualify as an IC. They often make statements such as “I’ve always been an IC,” or “Either I work as an IC or I won’t work at all for you.”

A consultant who insists on being classified as an Independent Contractor when he does not meet the legal requirements puts both himself and the employer at great risk.

If you browse through this blog, or the Collabrus website, you will find dozens of articles that describe the dangers to the principle company if a consultant is found to be a misclassified employee. They include:

• Being assessed for the employer’s and the employee’s share of all payroll taxes, plus penalties and interest.
• All consultants performing services for the company are reviewed for misclassification.
• Agencies share information so there will be others standing in line once they realize there are misclassified workers.
• The company may be exposed to subsequent class action law suits.
• There are substantial legal fees associated with these actions.
• Management’s focus is re-directed from their customary work-a hidden cost.
• The company is typically placed on a “watch list” for years after, where any minor mistake is caught and billed…

However, the consultant is also exposed to risks:

• The IRS could disallow the business expenses claimed on a Schedule C for past years, creating a retroactive tax liability with penalty and interest.
• The IRS conducts “Retirement Plan Audits.” If the consultant has a self employed plan the IRS could decide to audit it, leading it to being disallowed.

Possibly more important are the unnecessary costs a misclassified consultant, who is pushing to be treated as an IC, faces:

• As an employee, your employer is responsible for withholding income taxes from your paycheck. As an IC you must manage and pay your own withholding at least once per quarter. Don’t fall behind-the IRS is brutal…
• As an IC you are responsible to pay both shares of Social Security and Medicare taxes. These total over 15%. Employers pay half for their employees.
• Some states charge a tax on professional services. For example, the states of Delaware, Hawaii, New Mexico and South Dakota impose a tax on accounting services. There are others. Massachusetts and Florida’s tried it and were forced to repeal them because of its unpopularity and its significant administrative problems. However, as governments look for more revenue watch for this to grow in popularity.
• As an IC you are exposed to personal liability if something goes wrong. As an employee you are protected under the employer’s umbrella.
• To protect yourself you may buy Professional Liability and Errors and Omissions Liability Insurance. IC’s pay for it, employees don’t.
• Maintaining a valid business establishment is another concern for IC’s. You may need to incorporate, file articles of incorporation with your state, appoint officers, a board of directors, bylaws, hold formal meetings, document the meetings, pay annual fees, market your services to gain new clients, maintain a business location, file a host of business and tax reports to various jurisdictions and a host of other tasks to keep your business valid and in good standing. As an employee you just show up and do your work.
• Health benefits? Many companies offer health insurance to their employers. Independent contractors pay their own way.
• How’s your 401(k) doing? Many employers provide matching contributions, up to some level, for employees, which can really leverage your retirement fund. IC’s are on their own.
• Company Stock Options are a great avenue to personal wealth and to enhance your retirement options. Many companies offer them to employees but not to independent contractors.
• Loyalty? Companies tend to support their employees, but often see contract labor as a come-in-do-the-job-and-leave asset. IC’s are often the first to go in hard times.
• Longevity and stability? An IC must put their flesh on the market every few months to seek out new clients. Employees show up and do their work.
• IRS Audits: The IRS scrutinizes 1099 and Schedule C Filers much closer than their W 2 counterparts at the same income level. Why? Because the IRS estimates 58% of the 1099 Schedule C Filers underreport their income and/or take erroneous, or excessive, business expense deductions.

If you are a consultant who is being told you do not qualify as an IC and must be placed on the payroll, consider the potential negative repercussions of misclassification and recognize that in this situation you may be better off as an employee.

Each year, for the past several years, both houses of Congress have introduced bills to really toughen up on worker misclassification. Each year the bills have quietly died in committee because of higher priority issues, such as: elections, stimulus, health care reform, wars, deficits, etc. Here comes a new legislative season and another run on worker misclassification-another opportunity for law makers to “Level the Playing Field.”

Senate Bill 770

On April 8, 2011, Senators Sherrod Brown (D-Ohio), Tom Harkin (D-Iowa), and Richard Blumenthal (D-Conn.) introduced Senate Bill 770, titled the Payroll Fraud Prevention Act. This bill is basically a remake of last year’s Employee Misclassification Prevention Act and copies several years’ of similar proposed legislation that keeps being introduced year-after-year. However, this new bill is more aggressive than its predecessors because it characterizes worker misclassification as “Payroll Fraud.”

Senator Brown says, businesses that misclassify workers are cheating workers…and other businesses that play by the rules.

One of the co-sponsors, Senator Brown (D-Ohio) issued a press release characterizing companies that misclassify workers as “cheating workers…and other businesses that play by the rules.” He also referenced the “tax gap” stating the bill will “relieve the burden on American taxpayers who foot the bill when businesses [misclassify their workers].”

The bill addresses unemployment insurance tax, federal minimum wage, overtime, child labor laws and sets up a mechanism for IRS audits.

S 770, if passed into law, would expand the federal Fair Labor Standards Act (FLSA), giving the Department of Labor (DOL) much stronger tools in discovering and punishing employers who misclassify their workers as ICs. The bill would also require DOL to report non-compliant businesses to the IRS.

(Typically when the IRS audits a company for worker misclassification they also look at the company’s income and expense items).

A repeating requirement, seen in almost every version of this bill for the past several years is the required notice to all workers-employee or IC-with harsh fines.

The proposed law would require every business to provide a written notice to all workers (including currently employed workers). This notice would notify them if they have been classified as an employee or “non-employee.” The notice would advise “non-employees” they do not have the same rights to benefits as employees. The notice would provide a phone number and website to contact DOL to make further inquires or to file complaints (i.e. instructions on how to ask DOL to set up an audit of the business!)

This bill creates a legal presumption that a “non-employee” is an “employee” if the business fails to provide the worker with the notice at the time the “non-employee” begins providing services. This presumption significantly raises the bar on proving you did it right.

It also makes it a criminal offense for discharging anyone (employee or non-employee) who:

• Makes an inquiry to DOL,
• Initiates a “proceeding” outlined in the notice,

The fines for the above, or for any employer who fails to provide the prescribed notice, is between $1,100 and $5,000 per worker. This fine would be in addition to all other civil suits, fines, taxes, penalties and interest that may arise from the misclassification.

Some other provisions of this bill are:

• Directs DOL to conduct “targeted audits” of certain industries “with frequent incidence of misclassifying employees as non-employees.”
• Creates a new definition of workers called “non-employees,” and defines this classification as a “Covered Individual,” even if, “the non-employees” are properly classified as independent contractors.
• Identifies individuals with their own corporation as “non-employees” who are covered by this bill. “Including those who provide services through a corporation or LLC, if they are required to create or maintain such entities as a condition for the provision of such labor or services.”
• Adds a new provision creating a “special prohibited act” under federal law if you “wrongfully classify an employee as a non-employee.”
• Provides for triple damages for willful violation of the minimum wage or overtime laws where the employer has misclassified the employee.

Click here (S. 770), if you would like to read the Payroll Fraud Prevention Act for yourself.

If the bill passes you may expect President Obama to sign it into law.  When he was a U.S. Senator he introduced a similar bill along with fellow Senators Kennedy and Durbin.  That bill was entitled, “Senate Bill 2044, the Independent Contractor Proper Classification Act of 2007.’