Got some misclassified independent contractors? Now might be the time to come clean.

As discussed here previously on the Blawg, the government continues to crack down on employers that misclassify independent contractors. Now, however, the IRS has announced a new Voluntary Compliance Settlement Program (VCSP) that will allow employers to rectify past independent contractor misclassifications by paying a small tax and agreeing to reclassify the contractors as employees.

Who’s Eligible?

Employers that:

• have consistently treated the workers as nonemployees;
• have filed all required 1099 forms the previous three years; and
• are not currently under audit for misclassifying those workers.

How Do You Apply?

Employers must file an Application for Voluntary Classification Settlement Program (Form 8952) at least 60 days before the reclassification. The form will be available on the IRS site in October.

What Happens After I Apply?

According to the IRS, an employer who participates in the VCSP:

• will agree to treat the workers as employees for future tax periods;
• will not be subject to an employment tax audit with respect to the workers’ classification for prior years;
• will pay 10% of the employment tax liability that may have been due on the compensation paid to the workers, without interest or penalties;
• will extend the period of limitations on the assessment of employment taxes for three years; and
• will, for the first three years under the program, also be subject to a special six-year statute of limitations, rather than the three-year limitation period that generally applies to payroll taxes.

Should I Do It?

As always, I highly recommend that you discuss any potential misclassifications with your favorite employment lawyer before taking action.

On Forbes.com, one prominent lawyer calls the VCSP “illusory” and advises employers to avoid it. Another prominent firm counsels employers to “think carefully” before jumping into the program.

Where Can I Get More Info?

Of course, the best advice is to classify all employees and contractors correctly in the first place. Click here for our handy independent contractor checklist and here for a recent Q&A on this topic.

Click here for VCSP FAQs from the IRS itself.

The Associated Press is reporting that the federal government is aggressively expanding its enforcement actions against businesses that misclassify independent contractors.

What’s Happening?

According to the report, the Department of Labor is signing information-sharing agreements with the IRS and nine states that will help enforcement agents target companies that unlawfully label employees as independent contractors to skirt minimum wage and overtime pay requirements. The DOL has also hired about 300 new agents to investigate wage complaints and has seen a 400% increase in backpay recoveries in recent years.

Noting that the new arrangement could subject employers to penalties from multiple agencies, Patricia Smith, the DOL’s top lawyer, said “There’s more of an incentive to be in compliance because the cost of what we consider to be illegal activity has increased.”

Participating states include Connecticut, Hawaii, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah and Washington, with New York indicating that it plans to join the effort in the future.

The Bottom Line

Now is not the time to run afoul of wage and hour laws. To stay out of trouble, click here for our handy Independent Contractor Checklist and here for a recent Question of the Week addressing this subject.

In preparation for today’s webinar, we created some new tools to help make your life easier:

• Confused about how the ADA and FMLA relate? Click here for a handy comparison of the two laws.
• Worried about the government’s crackdown on independent contractor misclassifications? Click here for our easy-to-use checklist.
• Social media freaking you out? Click here for a sample policy, courtesy of the fine folks at McGuireWoods LLP.

We’ll discuss all these tools plus a whole lot more in today’s webinar. See today’s earlier post to sign up.

Each week, we post a thought-provoking question for your consideration.  Here’s last week’s question, along with your answers . . .

How do you tell if an independent contractor is really an independent contractor (as opposed to an employee)?

a.  It depends on a confusing, ambiguous multi-factor test dependent on behavioral control, financial control and the parties’ overall relationship that differs in workers’ compensation, tax and other contexts (56%)

b.  It is the employer’s option to choose either status, depending on which is more advantageous from a tax perspective (2%)

c.  It is the employee’s option to choose (1%)

d.  Under the newly passed Contractor Clarification Act (CCA), a person can be an independent contractor only if s/he (1) is separately incorporated, (2) provides services to other companies and (3) works in a recognized “independent profession” as defined under the law (41%)

The correct answer is “a.” Unfortunately, there’s no such thing as the “Contractor Clarification Act.”

The test for independent contractor status is confusing and is different in workers’ comp, tax and other contexts. Indeed, the IRS test used to be called the “Twenty Factor Test.” Not long ago, it was “shortened” to the “Four Factor Test” each of which, unfortunately, contains five criteria each.

Generally speaking, all of the tests come down to whether the company controls the person or whether s/he is truly an independent agent serving more than one company. True independent contractors are a relatively rare breed. If you have financial and behavioral control over a person, s/he is probably an employee and not an independent contractor.

Now is not the time to be on the wrong side of this issue. As we have previously discussed, the Department of Labor is spending $25 million and hiring 100 enforcement agents to target independent contractor misclassifications.

Our viewers are now batting a healthy .548 overall (23 right, 19 wrong) on our questions. The next one will be coming your way soon. Thanks for your participation!

Representative Jim McDermott (D-WA) has reintroduced the Taxpayer Responsibility, Accountability and Consistency Act of 2009 (TRACA) (HR 2408).

TRACA would (1) allow workers to petition the IRS if they believe they have been misclassified as independent contractors by their employers and (2) significantly beef up employer penalties.

For example, per-tax-return penalties for large employers (more than $5 million in revenue) would quintuple from $50 to $250 up to a total of $3 million – a twelve-fold increase over the existing maximum. Smaller companies would have a maximum penalty of $1 million — a ten-fold increase.

The bill is currently pending with the House’s Ways and Means Committee. Click here to see the bill and here for additional info.

On the heels of a $17.4 million verdict and the filing of a 20,000+-member class action, it now appears that FedEx may also be facing a $319 million fine from the IRS due to the company’s alleged misclassification of employees as independent contractors.

The potential fine was disclosed in FedEx’s most recent Form 10-Q filing, which stated that IRS auditors have “tentatively concluded, subject to further discussion,” that the company’s delivery operators should be reclassified as employees for federal employment tax purposes. 

FedEx maintains that it has “strong defenses to the IRS’s tentative assessment and will vigorously defend our position, as we continue to believe that FedEx Ground’s owner-operators are independent contractors.”  However, the company also disclosed that it is making “changes to its relationship with the contractors that, among other things, provide incentives for improved service and enhanced regulatory and other compliance by our contractors.”

Reactions from organized labor were decidedly different.  “What a great Christmas gift to FedEx Ground workers who have suffered under FedEx’s illegal independent contractor scam,” Teamsters President Jim Hoffa said.  “FedEx has been skirting the law, and the Teamsters welcome the IRS decision.”

The IRS audit and fine apparently only relate to the 2002 tax year.  Additional fines totalling well over a billion dollars could be forthcoming as the IRS audits additional years.

The lesson?  As we’ve said many times before, misclassifying employees as independent contractors can be hazardous to your company’s health.  The rule of thumb:  If an employer has behavioral or financial control over a person, that person is an employee, not an independent contractor.

The California Supreme Court upheld a lower court ruling that 209 FedEx drivers are employees and not independent contractors.  As a result, the company must pay a total of $17.4 million in reimbursements, costs and attorneys’ fees.

As discussed in a recent Questions of the Week, true independent contractors are relatively rare.  The test for independent contractor status is ambiguous and confusing and is different in workers’ comp, tax and other contexts.  Indeed, the IRS test used to be called the “Twenty Factor Test.”  Not long ago, it was “shortened” to the “Four Factor Test” each of which, unfortunately, contains five criteria each.

Generally speaking, all of the tests come down to this:  Does the company control the person or is s/he truly an independent agent serving more than one company?

The court in the FedEx case found that “FedEx’s control over every exquisite detail of the drivers’ performance, including the color of their socks and the style of their hair, supports the trial court’s conclusion that the drivers are employees, not independent contractors.”  In addition, the drivers were required to wear a FedEx uniform, work rigid schedules set by FedEx, buy or lease a truck meeting FedEx specifications and generally subjected to strict oversight in performing their duties.

The lesson?  Misclassifying employees as independent contractors can be hazardous to your company’s health.  The rule of thumb:  If an employer has behavioral or financial control over a person, that person ain’t an independent contractor.

Each week, we post a thought-provoking question for your consideration.  Here’s last week’s question, along with your answers . . .

How do you tell if an independent contractor is really an independent contractor (as opposed to an employee)?

a.  It depends on a confusing, ambiguous multi-factor test dependent on behavioral control, financial control and the parties’ overall relationship that differs in workers’ compensation, tax and other contexts (44%)

b.  It is the employer’s option to choose either status, depending on which is more advantageous from a tax perspective (2%)

c.  It is the employee’s option to choose (4%)

d.  Under the newly passed Contractor Clarification Act (CCA), a person can be an independent contractor only if s/he (1) is separately incorporated, (2) provides services to other companies and (3) works in a recognized “independent profession” as defined under the law (50%)   

The correct answer is “a.”  Unfortunately, there’s no such thing as the “Contractor Clarification Act.”

The test for independent contractor status is confusing and is different in workers’ comp, tax and other contexts.  Indeed, the IRS test used to be called the “Twenty Factor Test.”  Not long ago, it was “shortened” to the “Four Factor Test” each of which, unfortunately, contains five criteria each.

Generally speaking, all of the tests come down to whether the company controls the person or whether s/he is truly an independent agent serving more than one company.  In our experience, true independent contractors are a rare breed.  If you have financial and behavioral control over a person, s/he is probably an employee and not an independent contractor.

Our viewers are now batting .500 overall (6 right, 6 wrong) on our weekly questions.

The next one will be coming your way soon.  Thanks for your participation!