Misclassification of Independent Workers: Is Your Staffing Company at Risk?

Misclassification of Independent Workers: Is Your Staffing Company at Risk?

 
As we move into 2013, one thing we know for certain is that the U.S. Department of Labor (DOL) will continue their investigation on misclassification of independent contracts. The DOL is working with the IRS as well as other federal and state agencies to share information and jointly investigate claims of worker misclassification.
 
Have you taken the time to analyze what the stakes are in making the decision to have independent contractors?
 

 
The DOL’s Fiscal Year 2013 budget includes $14 million allocated for independent contractor misclassification, including hiring an additional 35 full-time investigators “as part of an initiative to detect and deter the inappropriate misclassification of employees as independent contractors.”  Along with the DOL, several states have already enacted legislation imposing steep penalties on employers who misclassify.
 
Consequences of misclassifying employees as independent contractors are potentially huge, including social security tax, federal unemployment, state unemployment, interest and penalties, workers compensation insurance, unpaid benefits, unpaid overtime and minimum wages and liquidated damages.  
 
Whether a person is an independent contractor or an employee generally depends on the amount of control exercised by the employer over the work being done. A number of federal and state government agencies have various ways of assessing whether a worker is an employee or an independent contractor, but the challenge is there is no single test for determining the status. Each test uses various factors with no factor being the controlling factor. Thus, an individual or company can be deemed an independent contractor under one law and an employee under another.  
 
The IRS historically follows the common law rules and uses what has become known as the “Twenty Factor” test (we have included it for your review).  Recently, the IRS attempted to simplify and refine the test by consolidating the twenty factors into eleven main tests. When looking at unemployment compensation benefits, many states follow what is commonly referred to as the “ABC Test” for determining whether an individual is an independent contractor or employee.  
 
Utilizing best practices and appropriate supporting documentation goes a long way toward defending against audits, unemployment claims and lawsuits. 
 
As the year comes to a close, I strongly suggest you perform a self-audit. Carefully look at every person deemed a contractor. Use the IRS Independent Contractor Appendix D test on each contractor (a link has been included below). Document each response. If you uncover anything that could be a red flag, consider making changes to help ensure compliance. 
 
At the end of the day it is your decision: consider the risk vs. the reward. It’s your call, but be ready to pay up when you’ve been caught.
 

Resources:

 

Independent Contractor Test – Internal Revenue Service Appendix D

 

DOL – Press Releases: Employee Misclassification as Independent Contractors

 
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