Earlier this month, Sen. Sherrod Brown (D-OH) introduced senate bill 770 or the “Payroll Fraud Prevention Act.” The bill, which amends the Fair Labor Standards Act (FLSA) of 1938, is designed to curb misclassification of employees as self-employed individuals. The bill also empowers the Department of Labor (DOL), the enforcer of FLSA, as an auditing agency for proper worker classification.

Analysis by Catherine Chidyausiku, ICon’s Director of Compliance

This new bill S. 770, the Payroll Fraud Prevention Act is very similar to the Employee Misclassification Prevention Act introduced almost exactly one year ago also, by Sen. Brown. This reintroduction is interesting because it shows that even with the shift in Congress there is still an interest in increasing the requirements relating to independent contractor compliance, while increasing the penalties for misclassification. Because this has been introduced so early in this session of Congress it likely has a better chance of making it all the way through and into law this time round.

News and events from the supporters of the bill

In a press release dated April 11, Sen. Brown stated:

“Intentionally treating workers as subcontractors when they really are employees is payroll fraud: it cheats workers, taxpayers, and other businesses that play by the rules,” Brown said. “By cracking down on payroll fraud, this bill will protect workers and level the playing field for all employers. Honest businesses have enough challenges to worry about in a tough economy. They should not have to compete against companies that misclassify workers and evade their tax responsibilities. When companies cheat, taxpayers are left on the hook instead—and public services that benefit everyone are short-changed because of unscrupulous business practices.”

“And at a time when our economy is still on the mend—not to mention the troubling attacks on collective bargaining rights for workers across the country—we must ensure that workers have access to the benefits and protections that they have earned and are entitled to,” Brown continued.

A co-sponsor of the bill, Sen. Richard Blumenthal (D-CT) published a press release and spoke at a news conference April 25 in Wethersfield, CT.

“A crackdown on misclassification is long overdue because it does devastating harm to taxpayers, workers and honest businesses,” said Blumenthal. “Calling workers independent contractors when they are really employees costs workers benefits, taxpayers revenue and other businesses a fair opportunity to compete for work.”

He was joined by Nick Civitillo, a mason contractor, and Matthew Capece who represented the Brotherhood of Carpenters and Joiners.
“Millions of dollars and billions of dollars nationally are being stolen from taxpayers and our federal and state governments by employers who are misclassifying workers,” said Matthew Capece, Brotherhood of Carpenters and Joiners.

It seems a straightforward and easy enough concept to grasp.
It seems an easy enough task to execute: to simply be sure that everyone is clear on your IC compliance process.

Until you begin to unpack it…

Who exactly is “everyone”?

How do you know that you’ve delivered clarity in everyone’s mind?

What is your process? And how do you preserve the integrity of your IC compliance vetting process, while a slice of the “everyone” population may be stepping outside of it and customizing it to their liking?

This looked deceptively simple on the surface, didn’t it? So, we offer some tips to make this objective achievable by answering the first question.

Who exactly is “everyone”? Armed with a good operating definition of “everyone,” you can tackle the second and third questions. Without it, you’re starting off on the wrong foot.

Where IC compliance is concerned, a whole host of people will be involved at various stages of the process. Some are involved at the implementation and roll out phase only; while others will continue to be part of the daily management or as actual users of the program. Let’s focus on the latter.

Below is a list of stakeholder categories, post implementation, of your IC compliance program. Based on how your organization manages its contingent workforce (CW) program, you may have less or more involvement from these various departments. These groups of people must be made aware of the purpose of the program—the business reasons and the legal reasons. Additionally, keeping them apprised of changes—sometimes big, sometimes small—will go a long way to keeping their buy-in. If you like to share information on a need-to-know basis, the following categories of people need to know. Of course, you can dial up or down what and how much you will share depending on their role.

IC Compliance Program Users
• Your independent contactors
• You hiring managers
• Your client, if your IC is client-facing
We’re stating the obvious here, on one level, but it bears spelling out. The people in this category are those who touch the program on a daily basis. Their status, actions, and/or behaviors during an engagement are what keep your organization compliant or non-compliant by worker classification rules and regulations. Going back to the importance of definitions for a moment, if you don’t know how your company defines independent contractors, start there.

IC Compliance Program Management
• Strategic sourcing, Procurement
• Talent acquisition, Human Resources
• Legal, Contracts
This group is at the front line of defense. Yes, it is you we’re talking to when we say; “Make sure everyone is clear on the process.” You set, promote, and enforce the policies and crystalize the business rules of the program. You are the decision makers. You are the action takers. You own the IC compliance program and are at the fulcrum between the internal and external stakeholders. The aim for clarity starts within you group.

IC Compliance Program Systems Support
• Accounts Payable
• Information Technology
• Security
It is easy to take this group for granted. Often they’re the last ones notified that an IC has been engaged. And that the IC needs to be paid, or given login access to the company’s systems, or be let into the building. If your IC is left to his or her own devices to obtain payment or access, something has gone terribly wrong. If this group is informed enough to be proactive, then your program is in good shape. If they don’t know when to turn off an IC’s access and thereby risking the company’s intellectual property, that’s a bright red flag.

IC Compliance Response Team
• Tax
• Audit
If the tax man ever cometh, your company’s internal counterpart had better be ready and well-informed. Usually CW programs and these two departments of tax and audit don’t intersect with HR or CW program management until there’s a problem. “We’re being audited. How are we handling ICs?” Ideally, they don’t even have to ask. If they have been educated on the program and are clear on the process, then they would know to simply ask for your defense files for the years and individuals named.

IC Compliance Champion
• Executive Sponsor
You absolutely need this executive in order to implement and adopt your IC compliance program in the first place. You’ll need them again if or when there’s a major change or crisis. Don’t forget to tell them the good news, too. Share with them the successes of the program: The savings garnered. The audit passed with flying colors. Keep them in the loop to promote the ongoing use of the IC program and to discourage those tempted to resort to workarounds or to seek back-doors.

IC Compliance Solutions Vendor
• IC compliance solutions vendor
• Your VMS/MSP
For the great majority of enterprise companies, this is an external group. Building up the subject matter expertise internally and building customized compliance tools is costly and a great distraction away from the core of your business. They are the experts in compliance. You are the expert on your company, its culture and unique needs. Make it a habit to keep them in the loop, especially if business rules change or when there is a significant change in your workforce. For example, if a merger or acquisition is on the horizon, lean on your IC compliance vendor to plan for accommodating a new set of ICs and hiring managers. Other vendors who need to be kept informed include those who distribute payment to ICs, which is likely to be the same one that provides the compliance tool. For some companies, the IC compliance tool/service may be delivered via a vendor management solution (VMS) or your managed service provider (MSP). However, you still have a direct relationship with your IC compliance vendor for indemnification purposes.

You’ll know that your IC compliance program is working if these stakeholders sound like a harmonious choir, singing off the same song sheet. You certainly don’t ever want to hear yelling from a hiring manager who is unable to quickly onboard talent, or a panicked voicemail message from your tax and audit department, or whistleblowing from your IC.