On February 9^th, California entered into its third agreement, this time in the form of a Memorandum of Understanding with the Department of Labor (DOL).  This agreement goes beyond any agreement previously signed by the state and covers a variety of joint efforts to audit and penalize employers for misclassifying workers as independent contractors.

The DOL has already entered into similar agreements with Colorado, Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah and Washington.  Further details of each agreement can be found on the DOL’s dedicated worker misclassification web page.

In 2011, the Wage and Hour Division of the DOL collected $5M in back wages alone – not including fines and penalties – that resulted from employees being misclassified as independent contractors.  Expect these efforts to multiply: this was before the DOL got a hefty budget and staff increase for 2012 and had state agencies join their enforcement army.

Is your company ready for a joint state-DOL attack?

In June of 2011, Pacific Steel, the nation’s third largest steel foundry, was targeted in a silent raid by ICE. By December of 2011, the company was forced to shed one third of its workers (over 200), many of whom were highly skilled and had been with the company for decades.

Soon after on December 23rd, a former employee (employed by Pacific Steel for 45 years) and his Berkeley attorney filed a $31 Million class action lawsuit for California Labor Law Violations.  As if civil fines up to $16,000 and criminal penalties up to 6 months in prison
for Form I-9 violations were not enough.

Arizona dairy producer Ross Tappan might have met a similar fate last year, had it not been for two important steps which saved his farm. Last April, while attending a United Dairymen of Arizona Meeting in Tempe, Mr. Tappan was alerted to a silent raid by a text message from his office manager after agents showed up at his farm.  The ensuing audit would drag on for a month, but thanks to a voluntary self-audit and the implementing and use of E-Verify three years earlier, Mr. Tappan would lose only ten employees.

The number of these silent raids is on the rise, from 1,444 in 2009 to 2,496 in 2011. And last year, the Social Security Administration resumed sending “no-match” letters (which alert employers that information on an employee’s W-2 form does not match information on file with the Social Security Administration), a program that was halted in 2007.  These letters are used by ICE to show that an employer had reason to believe an employee might not have documentation, and subject employers to higher fines and criminal penalties.

If ICE were to knock on your door, how would your I-9’s match up?  And how will your company handle I-9 compliance in the future?

Since 2008, the US DOL has conducted 183 investigations of construction industry employers throughout Connecticut and Rhode Island resulting in $3.3 million in back wages for 1,226 employees.  In the last fiscal year alone, the DOL has issued 159 crippling stop work orders and recovered $6 million in unpaid wages in Connecticut.  17 of those stop work orders were due to independent contractor misclassification during the period of October 27 through November 3 alone. Going forward, no warning, and no reasons will need to be given for these investigations.

If financial penalties and stop work orders are not enough, the Connecticut DOL arrested 75 contractors for nonpayment of wages last year.  And this was before the announcement of this U.S./Connecticut DOL task force in late November. A memorandum of understanding (MOU) signed in September, outlines the extensive collaboration between the two agencies.

Think you’re safe as a non-Connecticut non-construction employer? Think again.

The DOL has signed broad based MOUs with the Internal Revenue Service and 10 other states from Hawaii to Illinois to Maryland to “share information, to reduce the incidence of misclassification of employees, to help reduce the tax gap, and to improve compliance with federal [and state] labor laws” across all industries, not just construction.

Willful violators of the FLSA may be prosecuted criminally and fined up to $10,000. A second conviction may result in imprisonment. Civil penalties can amount to $1,100 per violation for willfully or repeatedly violating overtime pay requirements.

Still need a reason to rethink how your company classifies its IT professionals?

How about 137-million reasons? The plaintiffs firm of Lieff Cabraser Heimann & Bernstein netted $137.62 million dollars for thousands of IT employees seeking overtime pay that was wrongfully denied in just eight published settlements from 2006 through 2011.

Would your IT folks fixing a software bug afterhours or conducting weekend maintenance on your company website qualify?

Could they fall under the narrow computer-related occupations exemption of the FLSA?

Too often employers, both large and small, assume that IT folks are exempt employees or independent contractors, just because it seems like they should be or because everyone else is doing it that way.  But when it comes to independent contractor and FLSA compliance, there is no safety in numbers.

Go to ICon to learn more.

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.

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?

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.

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?

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?

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?