Employee Misclassification – Is Your Company at Risk?

An announced collaboration (here) by the IRS and the Department of Labor (DOL) lends some urgency to an issue that is talked about every tax season and election year: the misclassification of independent contractors. The DOL, which asserts that 30% of employers may be misclassifying workers, is actively promoting agreements with states to coordinate enforcement efforts. And the IRS, intent on stanching the billions of tax dollars lost each year to misclassification, has established a Voluntary Classification Settlement Program (VCSP) for partial tax relief to cooperating employers. Several factors are used to distinguish between employees and independent contractors. Of these, the most significant to current investigations are: the worker’s degree of independence and the employer’s degree of control. Making such determinations is especially tricky in such industries as trucking and distribution, where the status of owner-operators is in question. The Obama administration is paying close attention to those who charge that the “twenty common-law factors test” favors employers and shortchanges workers. President Obama, in fact, included a worker classification provision in his September 2012 plan for economic growth and deficit reduction. Employers who misclassify workers are subject to liability for unpaid wages, as well as severe tax penalties. To protect yourself, there are questions you need to ponder:

  • How can you as an employer effectively determine whether workers are independent contractors or employees?
  • How can your organization prepare for possible investigations?
  • How will your organization handle the need to reclassify some of its independent contractors as employees?

This year, the subject of change in the way workers are classified is more than campaign chatter. It is serious business for employers. So be smart—and consult a competent employment lawyer about ways to deal with this complex issue.