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Is That Worker An Employee? Part I



QUESTIONS AND ANSWERS ON WORKER CLASSIFICATION

If you own or manage a business that uses independent contractors, you need to know when you can or cannot treat a worker as an independent contractor. This article answers some of the common questions about worker classification.

INTRODUCTION

Misclassification of employees as independent contractors is now a common phrase uttered by state and federal legislators and regulators. State task forces have been formed to crack down on businesses that do not pay unemployment insurance and workers’ compensation premiums or withhold taxes for workers whom the state believes are employees and not independent contractors.

The IRS has also been active in seeking to restore lost tax revenues due to misclassification of independent contractors. Why does the IRS take reclassifying workers so seriously? The following statistics illustrate why. The IRS estimates that millions of dollars in tax revenue are lost each year due to misclassification of independent contractors. According to the IRS, $ 5 billion was underpaid in the following categories:

• FICA taxes estimated at $ 14 billion were underreported.

• Unemployment taxes estimated at $ 1 billion were underreported.

• Self-employment taxes estimated at $ 39 billion were underreported.

Even more shocking are studies that show that the number of misclassified workers has expanded by 50% from 30% back in 2000. These statistics indicate that, absent steps to attain compliance, hundreds of thousands of businesses have exposure to considerable financial liability for non-compliance with existing state and federal tax and labor laws with respect to their employee benefit plans.

Since 2011, the IRS has collected $9.5 million in back wages. That figure represents not only income taxes that employers failed to deduct from workers’ wages, but also FICA (Social Security and Medicare) taxes that were never withheld along with FUTA (federal unemployment) taxes that employers are obligated to pay.

Therefore, it should come as no surprise that the IRS is focused like a laser beam on signs that a contractor is misclassified. If there is even a hint that someone you’re paying as a contractor might actually be an employee, the IRS will reclassify him as such.

That sort of decision can prove very costly for a business owner. Indeed, there are fines and penalties associated with the process, as well as a requirement that the business owner pay back payroll taxes. Because XYZ Corporation has multiple contractors, I recommend that it create a compliance system to avoid misclassification liability. That compliance system should be based on an independent contractor relationship that is structured, documented, and implemented in a compliant manner.

I. Why does it matter how a company classifies its workers?

Having employees triggers a large set of state and federal compliance obligations for an employer. Some of these obligations include: (1) payment of unemployment insurance tax (administered by the state Department of Labor); (2) continuous maintenance of workers’ compensation and disability insurance policies; and (3) state and federal withholding tax and employment tax filing obligations.

Having independent contractors, on the other hand, is economically advantageous for an employer. Employers are not required to withhold taxes, make Social Security and Medicare contributions, or pay unemployment and workers’ compensation premiums. Similarly, employee benefit plans including group health insurance and 401(k) plans only cover employees, not independent contractors.

These economic inducements have led many businesses to unwittingly classify their workers as independent contractors even though they may fall within the definition of employees under the tax and labor laws.

II. What are the consequences of worker misclassification?

Consequences are potentially severe and far-ranging, and in serious cases may even be fatal to the company. And this is regardless of whether the employees have been mistakenly or intentionally misclassified. For businesses such as XYZ Corporation that are highly dependent on independent contractors, the potential costs of misclassification could be enormous.

Risks include liability for many years of the following: (1) unpaid federal, state, and local income tax withholdings; (2) unpaid Social Security and Medicare contributions; (3) unpaid workers’ compensation and unemployment insurance premiums; and (4) even unpaid work-related expenses and overtime compensation.

As if that was not bad enough, the IRS and state taxing agencies may even impose penalties for non-compliance. Such penalties may relate to the following: (1) the failure to carry workers’ compensation insurance; (2) penalties for years of unfiled employment tax returns going back any number of years (there is no statute of limitations for unfiled returns); and (3) the failure to deposit withholding taxes as required by law. Any one of these types of liabilities can be potentially devastating.

Another costly liability arises if misclassified employees who are otherwise entitled to coverage under employee benefit plans have not been provided health, pension, and other employee benefits. The Microsoft case in the 1990s demonstrates how costly misclassification can be, no matter how unintended, when workers classified as independent contractors are reclassified by the courts or regulatory agencies as employees. In addition to satisfying a very substantial payment obligation to the IRS, Microsoft paid $ 97 million to settle a benefits case brought by its long-term temps who were denied coverage under Microsoft’s stock purchase plan, plus millions more in legal fees for the workers’ class action lawyers.

Finally, unions have urged state and federal government regulators to vigorously prosecute businesses suspected of misclassification of employees as independent contractors as part of a concerted effort by organized labor to increase the number of employees that they currently represent. Simultaneously, labor unions have been lobbying for legislation at both the state and federal levels that would limit the use of independent contractors by businesses and, as a result, expose more workers to union organizing.

Despite media attention that has been focused on this issue, most companies have yet to diagnose their state of compliance or determine their potential liability. Fewer still have enhanced or updated their workforce models to minimize or eliminate the risks of costly government regulatory and class action litigation attacks.

III. In what ways are state and federal regulatory agencies focusing on independent contractor misclassification?

Since 2012, the U.S. Department of Labor has hired more investigators to “detect and deter” companies from misclassifying employees as independent contractors. The federal budget for Fiscal Year 2013 also financed inter-agency cooperation: $ 14 million was budgeted in the coming year for grants to states to assist them in identifying misclassification and recovering unpaid taxes.

The IRS has also been active in seeking to restore lost tax revenues due to misclassification of independent contractors. Recently, it entered into agreements with 34 states to share information and enforcement techniques about employers suspected of misclassifying employees.

In February 2010, the IRS commenced an Employment Tax National Research Project to conduct line-by-line audits of 6,000 businesses focusing on, among other things, employee misclassification. The best and most experienced auditors were brought in and were provided special training to determine whether these businesses were in compliance.

State workforce agencies have been equally vigorous in their regulatory and enforcement efforts. Most state workforce and tax agencies have substantially increased the number of random and targeted audits they conduct each year.

IV. If I misclassify my workers as independent contractors rather than employees, how will the government find out?

The red flag that often waves in the air for the government to see is when a so-called independent contractor files for worker’s compensation or unemployment and there is no record of that person being an employee. The number of such workers applying for unemployment benefits has skyrocketed in recent years due to the prolonged recession. With extended unemployment benefits now available to many laid off employees, there has been an explosion in the number of state audits triggered by workers who claim unemployment benefits.

Much to the chagrin of businesses, local claims offices are frequently finding that these workers have been misclassified and are entitled to unemployment benefits as “employees,” even though they may have signed independent contractor agreements or are receiving compensation on a 1099 basis.

If a business has not paid unemployment contributions to a state fund on behalf of that worker, the determination of the claims examiner can have the same effect as an adverse audit: once a single worker is found to have been misclassified, the business could be charged for unpaid contributions for “all similarly situated” workers, along with costly penalties and fines.

In addition to adverse determinations of “employee” status made by claims examiners, another common way the government finds out that a company may be misclassifying its workers is by none other than an audit of the company’s worker classification initiated by the state Department of Labor. What can trigger an audit? The most prevalent way is by workers who regard themselves as independent contractors nonetheless applying for unemployment benefits. Other common triggers for an audit include issuing an excessive number of forms 1099-Misc and use of a high percentage of independent contractors in comparison to the company’s overall labor pool.

If a company receives an IRS audit notification letter, that audit isn’t simply going to be a review of forms 941 (reporting income and employment taxes withheld) and forms 940 (FUTA taxes) for the tax year. Instead, it will be much broader. According to one expert: “[T]he IRS intends to drill down on the compensation that generated the withholding and then audit those various components for reporting compliance as well. They’ll be reviewing fringe benefits and nonqualified plans to see if they’re being reported properly.”

V. Does the fact that most, if not every company, in a given industry treats its sales force as independent contractors immunize XYZ Corporation from a successful challenge mounted by the IRS?

The short answer is “no.” The IRS can audit you, reject your treatment of workers as a misclassification, and leave all of your competitors alone even though they may be doing exactly what you did. It’s not because the IRS is trying to be unfair, it’s just that the IRS does not have the resources or the obligation to audit every business that misclassifies its workers.

The lesson is, do not simply follow the examples you see around you – they may be wrong. Get your own advice from an experienced attorney and handle your workers according to that advice regardless of what other businesses are doing.

VI. Is there a simple test for whether a worker is an independent contractor or employee?

The simple answer is no. Many factors are considered under all of the facts and circumstances. That means there is no formulaic answer. Why not? Because each business is different. The IRS cannot simply declare that any worker with a specific characteristic is an employee or an independent contractor. If, for example, the IRS adopted a simple, one size-fits all test that made whether a worker actually completed his work at the employer’s office the decisive factor, the results would lead to misclassification. Indeed, all telecommuting employees would be misclassified as independent contractors while all contractors performing maintenance at the employer’s workplace would be misclassified as employees. This illustrates why the classification of employees and contractors must be considered on a case-by-case basis.

So how does an employer know who the government considers an employee as opposed to an independent contractor? Focus on one word: control. Telling the difference between a contractor and employee is a matter of determining just how independent the individual is from the company he’s working for. Paul Herman, a CPA, explains how contractors and employees differ:

“… [A]n independent contractor is not under the employer’s control. An independent contractor negotiates their rate of pay, can set their own schedule, can refuse work or projects, provides an invoice on their letterhead for services performed, often works for other people, uses their own supplies, may get reimbursed for expenses, usually works on a project-by-project basis rather than for an indefinite period.”

Mr. Herman’s description of an employee is significantly different:

“An employee is under the employer’s direct control, whether they are full or part-time. The employer offers them a rate of compensation, they work a schedule determined by the employer, the employer provides workspace, tools, and supplies needed for the job. Employees may be required to punch in and out or keep a time sheet.”

The essential question is about the degree of control exercised over the worker. In order to determine whether the degree of control exercised over the worker is sufficient to establish an employment relationship, a distinction must be made between the right to control only the result of the work, on the one hand, and the right to control the means and methods of accomplishing the result, on the other hand.

By “means and methods,” the IRS is referring to the details of how the services are performed – i.e., what will be done and how it will be done. In general, the more the employer controls the details of how the services are performed the more likely the relationship is an employment relationship. On the other hand, the more independent the workers are from an employer’s control of how the work is performed and the circumstances under which it is performed, the more likely an independent contracting relationship exists.

The fact that an employer has the right to control the result of the work is meaningless when it comes to challenging a worker’s status as an independent contractor. Indeed, an employer can control the result of the work as much as he wants without jeopardizing a worker’s classification as an independent contractor. What matters is that the employer has the right to control the details of how the services are performed.

An example will help illustrate this point. It’s perfectly okay for the employer to give an independent contractor detailed guidelines or specifications for the results it expects. But how the contractor goes about achieving those results must be left entirely up to the contractor. In other words, under no circumstances can the employer dictate to the contractor how to do his job through written or verbal instructions.

VII. My workers all sign a contract and agree they are independent contractors. Won’t that help?

Probably not. Many business owners falsely assume that a plainly-worded contract in which their workers agree that they are independent contractors and not employees will somehow immunize the company from allegations of misclassification. There are several reasons why this is wishful thinking. First and foremost, the only question is control, and a contract provides weak evidence at best about how much control the business owner actually exercises over the way work is done or the circumstances under which it is performed.

Second, a contract that recites that the worker is an independent contractor offers no protection if the factors used by the court or government agency to determine the worker’s status demonstrate otherwise. In other words, if the relationship is truly an employer-employee relationship, it makes no difference how it is labeled in the contract. Indeed, the parties can refer to the relationship as an employer-contractor relationship until the cows come home, but if it is truly an employer-employee relationship, then the IRS will lift the veil and reclassify the workers as independent contractors. To that extent, the substance of the relationship, and not the label, governs the worker’s status.

And third, if the contract misstates the true relationship between the parties, then it is useless. An example would be a contract that states that the worker is not subject to the supervision of the company, yet he is regularly supervised by a company manager and given a yearly evaluation.

For these reasons, most courts find contracts to have little probative value. Some find no probative value.

This does not mean that companies should abandon the idea of entering into a written contract with their independent contractors that specifically states that they are independent contractors. On the contrary, there are many good reasons to use a written contract, not the least of which is that it illustrates how the parties perceive their relationship, one of the many factors that the IRS considers when it questions the classification of contractors. However, no matter what it says, companies should not rely on it for protection against misclassification challenges.

VIII. To be safe, should I just treat all workers as employees even if they are independent contractors?

No. There are two reasons. First, treating independent contractors as employees triggers a large set of compliance obligations that are costly and that will ultimately make your company less competitive in the marketplace. The second reason applies if your company maintains any type of qualified plan under ERISA, such as a 401(k). If so, classifying workers as employees when they are really contractors can disqualify the entire plan for all beneficiaries, even those who may be properly qualified.

IX. I’ve heard that Section 530 will protect my business as long as it follows an industry standard. Is that true?

Section 530 protects companies from the IRS reclassifying its workers as employees and collecting back taxes and excessive penalties. In order to qualify, the threshold requirements are as follows: first, the employer must have consistently treated its workers as independent contractors and second, the employer must have filed Form 1099-MISC for each such worker who earned $ 600 or more during the year in question. The company bears this burden.

In addition, the company must prove at least one of the following:

(1) That it had a reasonable basis to classify the workers as independent contractors;

(2) The company was previously audited when it treated similar workers as independent contractors and none of its workers were reclassified;

(3) A significant segment of the industry treats such workers as independent contractors; or

(4) The company relied on some other reasonable basis, such as the advice of an accountant or an attorney, to classify the workers as independent contractors.

Knowing what Section 530 does not provide relief for is just as important as knowing what it does provide relief for. Section 530 does not provide relief from unemployment insurance audits by the state Department of Labor. Nor does it provide relief from audits by the authority responsible for workers’ compensation and disability insurance.

X. What factors militate in favor of a worker being classified as an independent contractor?

A review of the factors used by courts and by various state and federal agencies reveals that, collectively, more than 48 factors are used by different decision-making bodies in determining independent contractor status. However, there is no magic or set number of factors that makes a worker an employee or an independent contractor. Similarly, no one factor is dispositive of whether a worker is an employee or an independent contractor. As the IRS has repeatedly stated, it will consider “all information that provides evidence of the degree of control and the degree of independence.”

The factors can be organized into one of three categories:

(1) Behavioral control: The facts that illustrate whether the employer has a right to direct or control how the worker performs the specific task for which he is engaged.

(2) Financial control: The facts that illustrate whether the employer has a right to direct or control how the business aspects of the worker’s activities are conducted.

(3) Relationship of the parties: The facts that illustrate how the parties perceive their relationship.

a. Behavioral Control

I. INDEPENDENT CONTRACTORS SHOULD RETAIN CONTROL OF THEIR WORK

The most fundamental difference between employees and independent contractors is that employers have the right to tell employees exactly what to do and how to do it. This is a recipe for disaster for the employer that intends to treat its workers as independent contractors. Whatever you do, don’t supervise or control an independent contractor as if he was one of your employees. It’s perfectly okay to provide detailed guidelines or specifications for the results that you expect from your contractors. But how those results are achieved must be left entirely up to the contractor.

Following these guidelines will show that the independent contractor is truly independent from the employer’s control:

• Do not provide training for contractors. Ongoing training is a particularly strong sign of an employer-employee relationship because it indicates that the company wants services performed in a particular way. However, orientation or information programs about company policies aren’t;

• Do not dictate a contractor’s working hours. However, contractors may be given a deadline for completing the work;

• If possible, the work should be performed somewhere other than the employer’s workplace, unless the work absolutely must be performed on location, as in the case where a contractor is hired to lay carpet or paint walls at an employer’s workplace. As just illustrated, the importance of this factor depends on the type of services involved and whether an employer generally would require employees to do similar work on its premises. The fact that a business requires work to be performed on its premises suggests control over the worker (if the work could be done elsewhere). Work done off the premises, such as at the worker’s office, indicates freedom from control;

• Do not provide instructions to contractors about when, where, and how to do their job. However, instructions regarding government standards are entirely permissible;

• To the extent that your contractors need help, do not be the one to hire, supervise, or pay assistants. A business that hires, supervises, and/or pays assistants for an independent contractor exhibits employer-like control over that contractor. Conversely, the relationship is more analogous to an employer-contractor relationship if the worker is contractually obligated to hire, supervise, and pay his own assistants.

II. INDEPENDENT CONTRACTORS SHOULD LOOK LIKE INDEPENDENT BUSINESSES

Independent contractors should take steps to show that they are independent businesspersons. A worker exhibits independent contractor status if he:

• Establishes his own business (preferably under a fictitious name rather than under his own name);

• Incorporates that business;

• Maintains a separate bank account for the business;

• Obtains all necessary licenses and permits;

• Carries business insurance

b. Financial Control

I. INDEPENDENT CONTRACTORS SHOULD MAKE THEIR SERVICES WIDELY AVAILABLE

The fact that a worker makes his services available to the general public – and not just to one person or company – on a regular and consistent basis indicates an independent contractor relationship. Here are some ways for independent contractors to do this:

• Obtain business cards and letterhead;

• Display a sign (or set up a website) advertising the business;

• Maintain listings in business directories, both on-line and in print;

• Attend trade shows and similar events;

• Join professional organizations;

• Advertise on-line and in newspapers, trade journals, and magazines;

• Mail brochures or other promotional materials to prospective clients.

II. INDEPENDENT CONTRACTORS SHOULD SHOW OPPORTUNITIES FOR PROFIT AND LOSS

Because they run their own businesses, independent contractors have the opportunity to earn profits or suffer losses. If a worker runs absolutely no risk of loss, then he’s probably not really an independent contractor. The best way to meet this test is for the contractor to have recurring business expenses, such as office rent, equipment, and salaries for assistants. This demonstrates that the contractor could suffer a loss if he doesn’t find enough work.

A contractor can show an opportunity for profit or loss if he:

• Owns the tools, materials, and other equipment needed to do the job. By contrast, a business that supplies a worker with these items exhibits characteristics of an employer-employee relationship;

• Invests in facilities that aren’t typically maintained by employees. A prime example of this is a contractor who rents or owns his own office. By contrast, an employee usually relies on the employer to provide the facilities needed to do the job.

A contractor can also show an opportunity for profit or loss if he charges his client a set price for a job, rather than billing by the hour or day. Why? Because the contractor will make money if the contract price exceeds his expenses but will come out in the red if his expenses exceed the contract price. However, payment by the hour, week, or month is permissible so long as it is nothing more than a convenient way of paying a lump-sum amount that was agreed upon by the parties as the cost of doing a job.

III. PAYMENT ON A STRAIGHT COMMISSION BASIS IS THE PREFERRED METHOD OF PAYMENT

Payment by the job or on a straight commission basis generally indicates that a worker is an independent contractor.

IV. INDEPENDENT CONTRACTORS SHOULD HAVE MULTIPLE CLIENTS

A worker who performs services for a number of unrelated businesses at the same time generally is treated as an independent contractor. If the nature of the work is such that the worker must work full-time for one client for an extended period of time, then he should try to work for other clients intermittently over the course of a year. For example, he might work for one client for six months, and then work for another client for the rest of the year.

V. INDEPENDENT CONTRACTORS SHOULD NOT BE REIMBURSED FOR BUSINESS EXPENSES

An employer should not ordinarily pay a contractor’s business and/or traveling expenses. Such payments exhibit characteristics of an employer-employee relationship.

c. Relationship of the Parties

I. INTENT OF THE PARTIES

While a written agreement alone won’t prove that a worker is an independent contractor, it nonetheless will show that both parties intended for the worker to be an independent contractor. The contract should make clear the following: first, that the worker is providing services as an independent contractor and second, that the employer does not have the right to control the way he does the work.

II. EMPLOYEE BENEFITS

A company providing employment benefits to a contractor is a big red flag for the IRS. Employment benefits include, but are not limited to, health insurance, paid vacations, and pension benefits.

III. SUBMISSION OF REGULAR OR WRITTEN REPORTS

A company’s requirement that the worker submit regular or written reports indicates a degree of control over the worker that is analogous to an employer-employee relationship.

IV. CONTINUOUS BUSINESS RELATIONSHIP

A continuous business relationship between the worker and the business suggests an employer-employee relationship. A continuous business relationship exists even when a worker is called in at irregular intervals, so long as those intervals are frequent and recurring.

V. DISCHARGE/TERMINATION

The right to fire a worker militates in favor of an employer-employee relationship. An independent contractor, on the other hand, cannot be fired as long as he completes the work that he was contracted for.

XI. I received a letter from the New Jersey Department of Labor or from the IRS that appears to question my worker classification. What should I do or not do?

Do not call the telephone number on the letter. Do not speak to anyone at the agency who issued the letter, not to ask a simple question, not for any reason at all. Do not send any information to the agency on your own.

Do contact an attorney immediately and engage someone in worker classification issues to represent you before the agency. Your attorney will handle all communications with the agency. Act quickly to engage an attorney so that he has time to respond effectively to the inquiry.

XII. Recommendations to Minimize or Avoid Future Misclassification Exposure for Companies That Use Independent Contractors to Supplement Their Workforce

There are no “quick and dirty” ways to enhance independent contractor compliance, and “one size fits all” solutions are likely to be ill-fitting. There are two alternatives that would permit XYZ Corporation to maintain its use of independent contractors while minimizing or avoiding future liability. Those alternatives include: (1) restructuring and re-documenting the relationship between XYZ Corporation and its independent contractors and (2) redistribution of XYZ Corporation’s independent contractors through a workforce management or staffing company.

While restructuring, re-documenting, and re-implementing might appear to be a daunting task, it is the only way to ensure that XYZ Corporation’s independent contractor model is sustainable and that it withstands legal scrutiny. The process need not be tedious and, once undertaken and completed, will place XYZ Corporation in an enviable position: namely, an enhanced state of compliance that can minimize the likelihood that any regulator or class action lawyer will seek to litigate the company’s past.

a. Bona Fide Restructuring and Re-documentation

The first step that I recommend is to diagnose whether the company’s independent contractors are properly classified. That step, however, may be premature for any business that wishes to consider a bona fide restructuring of its relationship with its independent contractors.

Generally speaking, a bona fide restructuring is recommended whenever the nature of the work is susceptible to being performed in a meaningful manner with substantially less control than is currently exercised. Most businesses concerned with the potential for misclassification liability recognize that, at best, their independent contractors fall within the “gray area,” where some facts favor independent contractor status while others favor employee status.

As such, it is necessary to identify those areas that could be performed in a meaningful manner with less control than is currently exercised. For example, the corporation might consider allowing its contractors to set their own hours of work, perform services from home, supervise their own projects, and work for other companies.

Of course, the only way a bona fide restructuring is possible is if the corporation is willing to embrace it. That would require a willingness on the part of the corporation to make adjustments to its level of control over the manner and means by which its independent contractors accomplish their work.

To the extent that the corporation is willing to restructure, then the first step, even before diagnosing whether the corporation’s independent contractors are properly classified, is to make adjustments to a number of the 48 factors that guide the courts and regulatory agencies in determining how to classify a worker. Such changes can be implemented and memorialized in a written independent contractor agreement.

While on the subject of independent contractor agreements, an essential part of a bona fide restructuring involves a comprehensive review of, and revisions to, the existing independent contractor agreement. Once the corporation has determined how it would restructure its relationship with its independent contractors, the second step is to diagnose whether the corporation’s independent contractors are properly classified.

The third step is re-documenting the independent contractor relationship. This is a comprehensive step, as it should embody the entire relationship between the independent contractors and the corporation. Using a list of the “48 Factors-Plus” will ensure that the re-documentation of the independent contractor relationship is thorough and state-of-the-art.

The final step is implementing the restructuring. The goal here is to ensure that what is set forth in the independent contractor agreement will be implemented in the field and that it does not include empty recitals and misstatements of the relationship, which can provide fodder to class action lawyers and government regulators seeking to challenge worker classification on the basis that the agreement is fraudulent and misleading.

Other steps may include reviewing and revising the corporation’s operating manuals and procedures, documenting the implementation of certain provisions in the independent contractor agreement, and putting safeguards in place to ensure conformity with the restructured relationship with the independent contractors.

b. Re-distribution of Independent Contractors By Use of a Workforce Management or Staffing Company

Where bona fide restructuring is not a practical or viable alternative, another choice is to use a reputable workforce management or staffing company. This option does not completely eliminate all potential liability for misclassification, but the use of a responsible workforce organization can dramatically reduce the risk of such liability as well as the likelihood of a lawsuit challenging the classification of a group of workers paid on a 1099 basis.

It is important to recognize that workforce management and staffing organizations are not payroll companies. What does that mean? When they hire or retain some or all of a company’s independent contractors, they may treat them as either independent contractors or as employees.

If a staffing company treats the workers as independent contractors, then the company will take its own steps to maximize compliance with state and federal tax, workforce, and benefit laws. If the workers are instead treated as employees, then the staffing company will withhold income taxes, make Medicare and Social Security contributions, pay workers’ compensation and unemployment insurance premiums, and can even provide an array of benefits, including health insurance under a plan maintained by the leasing company.

Regardless of the type of organization used, selecting one that is reputable, knowledgeable, and experienced is critical. Otherwise, the workforce solutions or outsourcing company can create even greater exposure to misclassification liability.

One final word of caution. While the use of a knowledgeable and experienced outsourcing company can substantially lessen the risk of future misclassification liability, it is not a panacea or silver-lining. For example, a company that contracts with a leasing workforce management organization may still have to account for the independent contractors or employees it has retained or hired in the company’s benefit plan language and discrimination testing.

CONCLUSION

The use of independent contractors is still a viable means to supplement a company’s workforce in almost all states, and Congress has never considered a prohibition on the use of independent contractors. All a business is required to do is not misclassify employees as independent contractors. Lax enforcement of the tax and labor laws in the past as they apply to independent contractors has placed most businesses in the position where misclassification liability has become a genuine risk – if steps are not undertaken to reduce or eliminate this exposure using one of the alternatives previously discussed. In light of the current and pending legislative, regulatory, and judicial landscape, there is only one undesirable alternative: inaction.

In accordance with Circular 230 Disclosure

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As a former public defender, Michael has defended the poor, the forgotten, and the damned against a gov. that has seemingly unlimited resources to investigate and prosecute crimes. He has spent the last six years cutting his teeth on some of the most serious felony cases, obtaining favorable results for his clients. He knows what it’s like to go toe to toe with the government. In an adversarial environment that is akin to trench warfare, Michael has developed a reputation as a fearless litigator.

Michael graduated from the Thomas M. Cooley Law School. He then earned his LLM in International Tax. Michael’s unique background in tax law puts him into an elite category of criminal defense attorneys who specialize in criminal tax defense. His extensive trial experience and solid grounding in all major areas of taxation make him uniquely qualified to handle any white-collar case.

   

2 thoughts on “Is That Worker An Employee? Part I

  1. Whoaa!! I have printed the doc and will hand out to my clients…a must read. Thank you!

  2. Really great info, I have read a lot on this topic but this one my clients can even understand. I would love to give it to all of them who might be confused on this most confusing issue. Thanks

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