U.S. DOL Urges State Departments of Unemployment Insurance to Clamp Down on Worker Misclassification

Over $39 million in federal grants was awarded by the U.S. Department of Labor to 45 states and territories to help reduce the misclassification of employees as independent contractors and enhance unemployment insurance programs. With emotion and fanfare, U.S. Secretary of Labor Thomas Perez on September 22, 2015 explained:

"For more than 80 years, the unemployment insurance system has been a crucial lifeline for millions of working people who lost their job through no fault of their own. These (federal) grants will help states use every tool at their disposal to ensure payments are available to those who are eligible, and take important steps to reduce and recover improper payments.”

A concrete example of an important step is an increase in unemployment insurance audits with resulting assessments for independent contractor misclassification!

This is the second year that the U.S. DOL awarded federal grants to financially support the ability of state unemployment insurance tax programs to identify instances where employers allegedly misclassify employees as independent contractors or fail to report the wages paid to employee workers.

The U.S. Department of Labor’s website proudly announces:

“The Wage and Hour Division is working with the IRS and many states to combat employee misclassification and to ensure that workers get the wages, benefits, and protections to which they are entitled. We have entered into partnerships with 27 states to work together on this issue in a variety of ways – through, for example, information sharing and coordinated enforcement – to ensure that we are all using our resources most strategically, effectively and efficiently to address this significant (misclassification) problem.”

The U.S. DOL has been front and center lately as a champion of employees’ rights and a mortal foe of worker misclassification. It is therefore an increasingly hostile climate for companies using independent contractors.

Questions? Consultations on Independent Contractor Status? Call Attorney Nancy E. Joerg of Wessels Sherman’s St. Charles, Illinois office: (630) 377-1554 or email her at najoerg@wesselssherman.com.

Significant Change Coming In U.S. Department of Labor Audits Involving Independent Contractors

July 2013

The 2014 budget for the U.S. Department of Labor was released on April 10, 2013, and it has troubling overtones for employers. By evaluating this very telling budget information, it becomes clear that the U.S. Department of Labor is unfortunately going to change the way it organizes its enforcement activities aimed at worker classification (i.e., whether certain workers are independent contractors or employees).

MORE INVESTIGATIONS BASED ON INDUSTRY: According to this 2014 budget information, the U.S. Department of Labor will increase the percentage of investigations that it does based upon industry rather than complaints.

 

In the past, the U.S. Department of Labor has based its independent contractor investigations largely on complaints made by disgruntled workers. Now, the U.S. Department of Labor will look at companies in industries with a high prevalence of worker misclassification.

 

CERTAIN INDUSTRIES MORE LIKELY TO HAVE WORKER MIS­CLASSIFICA­TION: The U.S. Department of Labor’s 2014 budget information notes that certain industries are more likely to have worker misclassification (some of the industries named in this regard are construction, janitorial, home health care, child care, transportation, warehousing, meat and poultry processing, personnel service, etc).

 

The bottom line here is that a company using independent contractors may not have any reported complaints from its workers, but that company may still be targeted by the U.S. Department of Labor for an audit.

COORDINATION WITH VARIOUS STATES: The U.S. Department of Labor continues to threaten that it is going to coordinate its efforts in investigating independent contractor status with various states. 

 

The Obama administration has been vocal about the fact that it wants to increase its investigation and enforcement of those businesses that use independent contractors and also increase its coordination with other federal and state agencies.

 

COMPANIES SHOULD HAVE INDEPENDENT CONTRACTOR RELATION­SHIPS CAREFULLY REVIEWED BY A KNOWLEDGEABLE PROFESSIONAL: Any company that uses independent contractors should realize that the climate throughout the United States is much more aggressive in terms of state and federal investigation. Therefore, those companies should be sure to have their websites, independent contractor agreements and documentation, and overall independent contractor relationships carefully reviewed by a knowledgeable professional.

 

For consultations on limiting your liability in the use of independent contractors, contact Attorney Nancy E. Joerg, who enjoys a nationwide reputation in assisting companies who use Independent Contractors of all types.  Nancy Joerg can be reached at Wessels Sherman’s St. Charles, Illinois office: 630-377-1554 or email her at najoerg@wesselssherman.com.

What are the "Penalties" Under the Illinois Employee Classification Act?

By Nancy E. Joerg, Esq.

The Illinois Employee Classification Act (formerly House Bill 1795) is very punitive towards companies who are found to have misclassified their independent contractors!! It applies to construction and construction-related companies (including trucking companies) who use independent contractors in construction and construction related jobs. The law (heavily supported by unions) became effective January 1, 2008. It will usher in a blood bath for a large part of the Illinois business sector.

As used in this Act "penalties" encompass the following:

1. FIRST ILLINOIS DEPARTMENT OF LABOR (IDOL) AUDIT: An employer or entity that violates any of the provisions of this Act or any rule adopted under this Act shall be subject to a civil penalty not to exceed $1,500 for each violation found in the first audit by the IDOL.
2. ADDITIONAL IDOL AUDITS: Following a first audit, an employer or entity shall be subject to a civil penalty not to exceed $2,500 for each repeat violation found by the IDOL within a 5 year period.
3. VIOLATION FOR EACH PERSON FOR EACH DAY: For purposes of this Section, each violation of this Act for each person and for each day the violation continues shall constitute a separate and distinct violation.
4. AMOUNT OF PENALTY: In determining the amount of a penalty, the IDOL Director shall consider the appropriateness of the penalty to the employer or entity charged, upon the determination of the gravity of the violations. The amount of the penalty, when finally determined, may be recovered in a civil action filed in any circuit court by the IDOL Director, or a person aggrieved by a violation of this Act or any rule adopted under this Act.
5. BOUNTY HUNTER GETS 10%: In any civil action brought by an "interested party" (can be anyone!), the circuit court shall award the interested party 10% of the amount recovered. In such case, the remaining amount recovered shall be submitted to the IDOL Director. Any uncollected amount shall be subject to the provisions of the Illinois State Collection Act of 1986.
6. DEBARMENT FROM STATE CONTRACTS: For any second or subsequent violation determined by the IDOL which is within 5 years of an earlier violation, the IDOL shall add the employer or entity's name to a list to be posted on the IDOL's official website. Upon such notice, the Department shall notify the violating employer or entity. No state contract shall be awarded to an employer or entity appearing on the list until 4 years have elapsed from the date of the last violation.
7. WILLFUL VIOLATIONS: [DOUBLE VIOLATIONS]

• Whoever willfully violates any of the provisions of this Act or any rule adopted under this Act or whoever obstructs the IDOL Director, or his or her representatives, or any other person authorized to inspect places of employment under this Act shall be liable for penalties up to double the statutory amount. 
• PUNITIVE DAMAGES: Whoever willfully violates any of the provisions of this Act or any rule adopted under this Act shall be liable to the employee for punitive damages in an amount equal to the penalties assessed in subsection (a) of this Section.
• The penalty shall be imposed in cases in which an employer or entity's conduct is proven by a preponderance of the evidence to be willful. The penalty may be recovered in a civil action brought by the IDOL Director in any circuit court. In any such action, the IDOL Director shall be represented by the Attorney General. Any uncollected amount shall be subject to the provisions of the Illinois State Collection Act of 1986. 
• MISDEMEANOR/FELONY: An entity or employer that willfully violates any provision of this Act or any rule adopted under this Act commits a Class C misdemeanor. An entity or employer that commits a second or subsequent violation within a 5 year period commits a Class 4 felony.

If you have any questions about the Illinois Employee Classification Act, contact Senior Attorney and Shareholder Nancy Joerg at 630-377-1554 or najoerg@wesselssherman.com.

Should Your Company Take Advantage of the IRS Voluntary Worker Classification Settlement Program? Look Before You Leap!

October 2011

By: Nancy E. Joerg, Esq. 

On September 21, 2011, the Internal Revenue Service (IRS) kicked off its brand new Voluntary Worker Classification Settlement Program (VCSP). Under this revolutionary program, eligible employers can obtain substantial relief from federal payroll taxes they may have owed for the past if they voluntarily reclassify their workers who currently receive 1099s.

The IRS states that this new program will allow employers "the opportunity to get into compliance" by making a minimal payment covering past payroll tax obligations, rather than waiting for a possible future IRS audit.

ELIGIBILITY REQUIREMENTS:

 

To be eligible for the VCSP, an applicant company must:

• Consistently have treated the workers (i.e., independent contractors) in the past as nonemployees
• Have filed all required Forms 1099 for the workers (i.e., independent contractors) for the previous three years
• Not currently be under audit by the IRS
• Not currently be under audit by the Department of Labor or a state agency concerning the classification of these workers (i.e., independent contractors)

Also, a taxpayer company who was previously audited by the IRS (or the Department of Labor) concerning the classification of the workers will only be eligible for the VCSP if the taxpayer has complied with the results of that audit.

WHAT THE TAXPAYER COMPANY RECEIVES: A taxpayer company who participates in the VCSP will agree to prospectively treat the class of workers as employees for future tax periods. In exchange, the taxpayer company will pay 10% of the employment tax liability that may have been due on compensation paid to the misclassified independent contractors for the most recent year and will not be liable for any interest or penalties on the liability (and will not be subject to an employment tax audit with respect to the worker classification of the workers for prior years). 

CATEGORIES OF WORKERS: Some companies use many different categories of independent contractors. For example, a construction company may have categories of independent contractors including: drywallers, carpenters, painters, cement workers, door and window installers, etc. Companies may wonder whether they can enter into the VCSP for just one category of worker-the door and window installers, for example. The answer is yes. As a matter of fact, a company must agree when they enter into the Closing Agreement with the IRS under the VCSP that they will make all independent contractors in a certain category employees, such as all door and window installers, but the company does not have to agree to reclassify all different categories of independent contractors to employees under the VCSP. 

POTENTIAL PITFALLS: If a taxpayer company voluntarily reclassifies its independent contractors as employees, the company will likely be required to undergo costly changes such as adding workers compensation coverage, withholding income tax payments and taking Medicare and Social Security deductions from wages. Also, the company must agree to extend the statute of limitations period on assessment of employment taxes by the IRS for three years - for the first, second, and third calendar years beginning after the date on which the taxpayer company has agreed under the VCSP Closing Agreement to begin treating the workers as employees. 

Other unresolved issues may be liability concerning past overtime and other wage and hour violations, past employee benefits, etc. A lot to consider!

One big problem that I see is that once a company reclassifies its independent contractors to employee status, the possibility of using a Section 530/Safe Haven/Safe Harbor defense in the future will be lost forever as to that category of independent contractor. The VCSP would essentially require employers to forgo protections offered under Section 530. Employers with strong positions under Section 530 should be aware of what they are giving up!

You may wonder why a company would need to use a Section 530 defense in the future if they are no longer using independent contractors. The simple answer is that the company may decide in the future that it wants to go back to an independent contractor model after having tried the employee model for several years. If the company decides to go back to an independent contractor model, the company would no longer have the opportunity to use a Section 530 defense (because now they do not have consistent use of independent contractors which is a strict requirement of the Section 530/Safe Haven/Safe Harbor defense).

FORM 8952 - APPLICATION FOR VOLUNTARY CLASSIFICATION SETTLEMENT PROGRAM: There is an application online for acceptance into this VCSP program and interested companies might do well to review the two page application. It is interesting to read and see what a company must agree to and what information a company must give under penalty of perjury. 

Of course, just filling out an application to be accepted into the VCSP does not guarantee that a taxpayer company will be found eligible to enter the VCSP. One of the unanswered questions is - If a company is found to be ineligible for VCSP, could the information they have placed on the application be used by the IRS for audit leads? We know, for example, that when companies send in the IRS Form SS-8 to the IRS for an opinion on whether the worker is an independent contractor or an employee, the IRS occasionally uses the submitted IRS Form SS-8 form as a lead for an IRS audit of that company. Dirty pool?

The bottom line is that any company considering applying for the VCSP should think it over very carefully with an attorney who is exceptionally well versed in the independent contractor issue. This is not a step to be taken in a light hearted fashion. Currently the VCSP has no deadline or expiration date.

Questions or concerns? Call Attorney Nancy E. Joerg of Wessels Sherman's St. Charles, Illinois office: 630-377-1554 or email her at najoerg@wesselssherman.com.

IRS Targets Companies Using Independent Contractors

February 2010
By: Nancy E. Joerg, Esq.

For several decades, the independent contractor issue has been a cloud of anxiety hanging over the heads of the companies who use them. These companies worry - often with good reason - that they will be audited by the IRS and other government agencies.

Now, recent threatening announcements made by the IRS have created shockwaves across the United States. Per its own announcements to the public, the IRS is going on the warpath against companies using independent contractors (workers who are not classified as employees), unleashing 6,000 random audits starting in February 2010!

The IRS has stated that these audits will focus on five primary employment tax issues: worker classification (independent contractor versus employee), fringe benefits, reimbursed expenses, officer compensation and non-filers.

The IRS has announced that the audits in 2010 will likely focus on employment tax returns for the calendar years 2007 and 2008. (Of course, the IRS can expand the scope of the audit either backwards or forwards into other open employment tax years and into other tax issues).

In an intimidating observation, the IRS has remarked that there is very little that companies can do to avoid being targeted under this aggressive new audit initiative because the companies will be selected at random.

In an interview on September 18, 2009, IRS Chief of Employment Tax Operations John Tuzynski stated that the IRS will spend three years on the audits randomly selecting large and small companies across many different industries. (This announced audit initiative marks the first comprehensive examination of employment tax issues by the IRS since 1984.)

According to a report by the Government Accountability Office released in August 2009, only 3% of determinations submitted to the IRS showed workers to be true independent contractors. The IRS assessed over $64 million in taxes and penalties for worker misclassification in 2008. Improper classification, as viewed by the government, cheats the government out of employment tax revenue and the worker out of labor protection. The IRS point of view is that workers who are improperly classified as independent contractors can be unfairly denied health benefits, overtime pay and unemployment insurance granted to employees.

The IRS concludes there are numerous cases of misclassification that could result in increased money for the government and more benefits for workers, all of which will ultimately cost employers more money in the form of higher tax liabilities, reporting requirements and increased benefit expenses.

The announced IRS crackdown on independent contractor use is frightening to employers. The IRS has indicated these audits will be conducted by approximately 200 to 300 of its most experienced agents who will undergo further specialized training for their role in this employment tax audit initiative. These audits will very likely involve a line-by-line review of the company's employment tax returns. Businesses should review their compliance before these exams begin. Those with potential issues and concerns regarding the strength of their independent contractor relationships can beef things up in advance of these audits.

All companies who use independent contractors should take steps to:

1. Evaluate all independent contractor agreements with an experienced attorney.
2. Review your websites to make sure that, in your enthusiasm to advertise your services to prospective customers, you are not undermining your independent contractor relationship.
3. Collect key pieces of proof to show that the independent contractor is self employed.
4. Understand IRS Section 530 safe haven protection. (Section 530 is liberally construed in favor of the taxpayer, so it pays to be both aggressive and creative under this law.)
5. Know the IRS "tests" for your type of independent contractors. Not every type of independent contractor is treated the same.

 If your company is selected for an IRS audit, do not talk to an IRS agent or auditor without careful legal guidance. Just a few careless words can wreck the company's legal position as to independent contractor classification (especially for Section 530 safe haven defense). Establish a precise chain of command for responding to audit requests and other IRS communications. Control the IRS audit process by requesting additional time to respond to IRS requests for information, and narrow the scope of information requested where possible.

Now is the time to do a thorough "self audit"! Contact Nancy E. Joerg to set one up.

Questions? Please contact WS Shareholder and Senior Attorney Nancy E. Joerg at 630-377-1554 or najoerg@wesselssherman.com.