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.

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.

• 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.

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!