Would your company be willing accept a £5,000 fine for each terminated contract worker? Many UK organizations say “Yes”. But do they really have to bite the bullet?
According to a recent study by the Association of Professional Staffing Companies (APSCo), nearly a third of UK organizations (29%) are likely to terminate contractor and temporary worker assignments prematurely because of the Agency Workers Regulations (AWR) which came into effect on October 1, 2011.
Under the AWR, any agency workers (usually hired through a temporary agency or service) who have worked for 12 consecutive weeks at a company, will be entitled to the same pay, overtime and breaks as permanent staff doing the same job. They must also have equal access to intranets, internal job postings, transportation, cafeterias and canteens, and be given comparable bonuses and annual leave. Failing to comply or intentional avoidance of AWR provisions by strategically firing agency workers before 12 weeks carries a heavy fine of £5,000 GBP (approx. $7,860.65 USD) from Her Majesty’s Revenue and Customs (HMRC).
Both the number of effected workers and the potential cost to employers are massive. The UK possesses a growing army of 1.4 million skilled temporary workers (up by 300,000 – or 21% per year – since 2008). And the expected cost to employers of the AWR is £1.3 billion ($2.04 billion USD) per year.
Are you among this 29% willing to play Russian roulette with Britain’s HMRC?
You don’t have be. Go to ICon to learn more.
ICon works with a team of experts in employment and tax law to ensure our services are fully compliant with existing legislation and the latest government regulations. You can contact us now for a tailored proposal based on your individual circumstances.
Many companies that fail a worker classification audit are caught off-guard – no surprise there. However, many organizations that fail an audit thought they had an independent contractor compliance program in place. These companies would only work with incorporated ICs – no 1099 is filed, and they weren’t working with an individual, right?
Wrong. The federal and state auditing agencies, including the IRS, place as much importance on incorporation in the audit process as they do on an independent contractor agreement – little or none. What really matters is who was providing the services. For example, was it really a corporation providing the services, or was it an individual who happens to be incorporated? Then the auditing agency will look at how the company controlled that individual’s work.
Don’t fall into this common compliance trap. Best practices suggest that companies should evaluate all corporations with fewer than 5 employees for independent contractor compliance.
Who does your company evaluate? Who is falling through the cracks?
Does your company make independent contractor classification decisions based on the right criteria?
Many organizations forget that it isn’t what you call your ICs, but how you treat them. Earlier this month, the National Labor Relations Board (NLRB) found that symphony musicians in three different states were improperly classified as independent contractors. While, in general, musicians have been classified as independent contractors by government agencies and the courts, these symphony musicians were being treated like employees. Management set work hours, payment schedules, dress code, and behavioral standards.
Managers at many companies carefully orchestrate their projects, but forget to treat independent contractors differently from regular employees. Independent contractors need to be, well, independent – free to choose how to complete a project. This doesn’t mean that managers can’t have a say in what is done or the quality of the work. Managers should, however, refrain from “pulling the strings.”
Read the entire NLRB decision here.
Striking a chord with managers on IC compliance can be difficult – but it doesn’t have to be. Go to ICon to learn more.
As the IRS closes the multi-billion dollar “tax gap”, the difference between taxes owed and taxes actually paid to the IRS, the number of audits have skyrocketed.
The misclassification of illegal immigrants as independent contractors contributes significantly to that gap. According to the Pew Hispanic Center in Washington D.C., more than $12 billion dollars in state and federal taxes go unpaid each year due to the misclassification of illegal immigrants in the construction industry alone. And that $12 billion has become a prime target for the IRS and the states.
How are they trying to collect it? While the government uses an I-9 form to confirm the legal status of employees, no such form is used for independent contractors. Companies are instead required to collect Taxpayer Identification Numbers (TIN) and verify that those numbers are valid. If a company fails to do so, the government imposes heavy penalties (up to $50 per invalid TIN), and requires employers to withhold payments from any workers without a valid TIN.
This is just another complexity to dealing with an independent workforce – and the government is out in force to make sure companies are following these rules.
How does your organization handle the validation of TIN?
When it comes to classifying insurance agents, the state of California can’t seem to make up its mind. On the one hand, state agencies such as the EDD have aggressively audited insurance companies over the past few years and found some insurance agents to be employees. However, a California appeals court recently ruled that an insurance agent working for Mutual of Omaha Insurance Company was an independent contractor. What does this mean for employers in the state of California? Beware. And this advice is not limited to companies using insurance agents.
Employers in California must account for the variety of standards when it comes to determining the status of their workers. And as this recent dichotomy proves, employers must consider the possibility that a worker’s classification may differ from one test to another or may change as a worker’s projects change.
You can read the full ruling here.
How does your organization evaluate potential independent contractors under various state and federal tests?
If monetary penalties and bad PR were not enough of a deterrent for independent contractor misclassification, Massachusetts has upped the ante with a two-year jail sentence.
On Monday, a Massachusetts judge forced a roofing company to pay extensive back wages, fines and penalties. As for the owners? One received two years in jail, five years of probation and an individual fine and restitution, the other two years of probation and extensive fines and restitution for misclassifying employees as independent contractors.
The indictments were the result of investigations by Massachusetts Attorney General, Martha Coakley. Coakley has been a vocal advocate for workers’ rights for her entire tenure, creating the Joint Enforcement Task Force on the Underground Economy and Employee Misclassification (JTF). The JTF collected over $8M in penalties from employers in 2010 alone; the penalties for 2011 should be released soon and are expected to be significantly higher than 2010, with those penalties increasing even further in 2012.
Don’t expect the indictments and jail sentences to stop here – the JTF is only getting started.
Who at your company would be held responsible for the misclassification of independent contractors?
The amount of unpaid taxes owed to the U.S. government has grown drastically over five short years, according to data released by the IRS on Friday. The tax gap for 2006 alone reached $450B, up from $345B for 2001 and far higher than many previous estimates.
The bigger problem is the cause of that gap. When income is reported or withheld by a third-party, such as with wage and salary payments on a W-2, the rate of misreporting (i.e. underreporting and failure to report) is a mere one percent (1%). However, when there is no such reporting or withholding, the rate of misreporting jumps to fifty-six percent (56%).
What isn’t reported? Payments between corporations. This is the reason that many organizations believe they can achieve “compliance” by only working with incorporated independent contractors. However, over the past couple of years, the IRS has increased its focus on these relationships. In fact, many incorporated independent contractors have been found to be employees in both federal and state audits. These contractors’ corporations were completely disregarded.
With this new report out from the IRS, employers need to prepare for an even higher level of scrutiny. The IRS has its sights set on reducing the tax gap and the way is clear – focusing on payments that aren’t reported and ensuring that those payments are properly classified.
Did you know that working with incorporated independent contractors doesn’t eliminate your misclassification risk?
You can read more about the tax gap here.
Many organizations focus on “1099 compliance” – that is, ensuring that they are compliant with the United States Internal Revenue Service rules. That is no longer enough. Independent contractor compliance has become a growing global concern.
Australia is the latest of many countries (including Canada, U.K. and U.S.) to formally increase enforcement of worker classification laws. The Australian Tax Office (ATO) will send out audit notices to more than 650 entities this month alone. The goal is clear – ensure that all independent contractors (or personal service businesses) are valid.
The ATO is under severe pressure to increase revenues – a motivation that has resulted in increased scrutiny of worker classification decisions around the globe over the last few years.
With companies becoming increasingly global, how is your organization confronting independent contractor compliance around the world?
We’re always talking about the importance of proper worker classification – making sure that your independent contractors are, in fact, independent contractors.
Why? The cost of misclassification can damage your business, drastically.
Several new laws that took effect on January 1 have raised those costs further. Some of those costs are obvious: in California, S.B. 459 imposed new penalties for misclassification of independent contractors, up to $25,000 for each violation. Other costs are hidden: many of the new laws govern employee benefits and rights – benefits and rights that will be owed to independent contractors that are reclassified as employees.
California had the most legislative activity in 2011. Starting January 1, new regulations are in place governing: credit reports; pregnancy leave and health care; commissions; health care coverage; E-Verify; employee leave; gender identity and expression; genetic information; and farm labor. Employers are struggling with S.B. 469 in particular, which requires formalized, mandated notices to all new employees (the required notice was only released by the CA Division of Labor Standards Enforcement on December 30, giving employers less than one day to implement it).
That’s just California – employers working in multiple states must worry about new legislation across the country. How are you tracking (and implementing) these constant changes?