All companies that pay wages to workers should be aware of the importance of properly classifying workers as employees or independent contractors. The distinctions between the two can have a profound impact on the various taxes, benefits and insurance which a company must pay on behalf of or offer to a worker. Typically, a company must pay more taxes and offer more benefits to an employee as opposed to their independent contractor counterpart. For instance, business entities are not required to withhold and pay income tax, social security, Medicare withholdings, unemployment and workers’ compensation for independent contractors, whereas they are required to make such payments on behalf of their employees.
It is not surprising that during the current economic recession, federal and state governmental agencies are actively pursuing tax revenue from any and all sources. The 111th Congress, this year alone has introduced two proposed laws which attempt to increase the regulation of worker classification. The Employee Misclassification Prevention Act (“EMPA”) was introduced in Congress in April of 2010. The basic thrust of this proposed law is to require all companies to maintain accurate and complete records of their engagement of independent contractors. EMPA would also require the company to provide notice to each worker of his/her classification as an employee or independent contractor. The proposed law also provides penalties for business entities that misclassify employees as independent contractors.
In September of this year, Congress introduced a proposed law by the name of the Fair Playing Field Act of 2010. This proposed law attempts to close a loophole which allows for reduced penalties (as compared to comparable tax violations) for the failure to deduct and withhold income taxes in the case of worker misclassification.
Although, neither of these proposed laws has yet to pass into law, they both have the support of U.S. Department of Labor and several of the country’s largest labor unions. The Obama administration has openly announced that it is going to increase governmental scrutiny of worker misclassification during the upcoming years. In fact, approximately $25 million dollars has been earmarked by the Federal Government for the 2011 Fiscal Year alone for the prosecution and investigation of worker misclassification.
Now more then ever it is imperative that companies properly classify their workers. Several years ago the Internal Revenue Service (which was the federal agency primarily responsible for issuing guidance regarding worker classification) abandoned what was commonly known as the “Twenty Factor Test” and attempted to simplify and streamline the test. The new guidance that was issued consolidates the original 20 factors into 11 main factors and then organizes the factors into 3 main groups: behavioral control, financial control, and the type of relationship of the parties.
It is important to note that there is no bright-line test that can be used to definitively classify a worker as an employee versus an independent contractor. The determination must be made on a case-by-case basis by a skilled attorney who is familiar with the various IRS factors, prior guidance on the subject and how to analyze and properly classify a worker.
If you have further questions or concerns regarding the classification of your company’s workers as independent contractors or employees, please do not hesitate to contact one of our Corporate & General Business or Employment and Labor Law attorneys.
