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Introduction
• Worker Classification: Employers' obligations under many
federal and state employment and tax laws can vary...
Introduction
• Classification Tests: While different laws may require employers
to use different tests to classify workers...
Why does it matter?
• IRS
 More difficult to collect income taxes from independent contractors
 Employer Mandate and Rep...
Why does it matter?
• Department Revenue of a State
 More difficult to collect income taxes from independent contractors
...
Risks Associated with
Employee Misclassification
Penalties
• Government fines
• Payment of employment taxes
 100% of FICA...
Who is an independent contractor?
Each governmental unit and/or agency uses its own analysis to
determine if a worker is a...
IRS Test
The IRS looks at the degree of control the employer exerts over the
worker and the degree of independence exhibit...
Behavioral Control
• Control over when and where the work will be done
• Whether or not the employer provides instruction ...
Financial Control
• Extent of unreimbursed business expenses
• Extent of worker’s investment in equipment and facilities
•...
Type of Relationship
• Whether or not the employer provides the worker with employee-
type benefits
 Insurance
 Pension ...
Fair Labor and Worker Classification
• The Fair Labor Standards Act (FLSA), which governs overtime
pay and minimum wages, ...
Fair Labor and Worker Classification
• The economic reality test requires an employer to examine whether a worker is
econo...
Employment Status Under Other Laws
• Workers' compensation laws do differ from other laws, in that it
may be more advantag...
US Supreme Court
In resolving disputes under the Fair Labor Standards Act, the US
Supreme Court has said that no single fa...
US Supreme Court
• The amount of the worker’s investment in facilities and equipment
• The nature and degree of control by...
Treated as an Employee
• How you treat a worker is part of the total picture in determining
his/her classification as an e...
Use of Temporary Employees
• Employment agencies hire, fire and pay the workers.
• Employment agencies are responsible for...
Use of Temporary Employees
• Employers are still required to comply with several Federal and
state employment laws.
• Poor...
Use of Joint Employers
A contracting company may be considered a “joint employer”
depending upon the amount of control it ...
Joint Employers
Factors to consider in determining if there is a joint employment
relationship include:
• The nature and d...
Liability of Joint Employer
• Anti-discrimination
 May be liable for discriminatory treatment or hostile work environment...
Liability of Joint Employer
• FLSA
 Both employers are liable for minimum wage and overtime
requirements
• NLRA
 Tempora...
Best Practices When Leasing Employees
• Seek an indemnity agreement in the contract with the staffing
agency so that the a...
Best Practices When Leasing Employees
• Employers should verify that the employees are covered under
the agency’s workers’...
ACA Concerns
Determination of employment status could:
• Affect the employer’s status as an
Applicable large employer.
• M...
IRS Voluntary Classification Settlement Program
Eligibility
• Are currently treating the workers as non-employees
• Have s...
IRS Voluntary Classification Settlement Program
Requirements
• Employer agrees to prospectively treat the workers as emplo...
IRS Voluntary Classification Settlement Program
Benefits
• Employer will pay 10% of employment tax liability that may have...
• Review all relationships with independent contractors and their
duties under the guidelines for all agencies (IRS, DOL, ...
DONT’s
• Treat independent contractors as employees
• Automatically refuse to address ADA accommodation requests by
indepe...
Questions?
Contact
Larry Grudzien
Phone(708) 717-9638
Email larry@larrygrudzien.com
Site www.larrygrudzien.com
Employee vs. Independent Contractor - How to Differentiate and Avoid Penalties?
Employee vs. Independent Contractor - How to Differentiate and Avoid Penalties?
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Employee vs. Independent Contractor - How to Differentiate and Avoid Penalties?

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This presentation reviews: which factors the IRS uses to determine common law employee status | how does this affect compliance with ACA | what penalties may apply.

Published in: Recruiting & HR
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Employee vs. Independent Contractor - How to Differentiate and Avoid Penalties?

  1. 1. Introduction • Worker Classification: Employers' obligations under many federal and state employment and tax laws can vary depending on whether workers are classified as employees or independent contractors within the meaning of the particular law. • Reasons to Use Independent Contractors: Many employers find it necessary or advantageous to use independent contractors for some types of work. In many cases, using independent contractors can be less costly and more flexible than hiring employees to perform the same work. • Penalties for Misclassification: Under various laws, employers can face severe penalties for classifying workers as independent contractors, when they actually are employees within the definition of the particular law.
  2. 2. Introduction • Classification Tests: While different laws may require employers to use different tests to classify workers as employees or independent contractors, most laws base such determinations on a “right to control” test. Essentially, under the right to control test, an employer-employee relationship exists when the employer has the right to control and direct the worker.
  3. 3. Why does it matter? • IRS  More difficult to collect income taxes from independent contractors  Employer Mandate and Reporting penalties • HHS  More difficult to collect payroll taxes from independent contractors • Department of Labor  Potential abuse of minimum wage and overtime laws  Potential abuse of anti-discrimination laws
  4. 4. Why does it matter? • Department Revenue of a State  More difficult to collect income taxes from independent contractors • Unemployment Agency of a State  Employers are not contributing to the UI fund • Workers Compensation Agency of a State  Workers are not protected  Employers are not contributing to the WC fund
  5. 5. Risks Associated with Employee Misclassification Penalties • Government fines • Payment of employment taxes  100% of FICA contribution  Employer may not collect employee amount from misclassified worker  Employer mandate  Reporting
  6. 6. Who is an independent contractor? Each governmental unit and/or agency uses its own analysis to determine if a worker is an “independent contractor” No unit/agency has a precise definition – the totality of the circumstances must be analyzed.
  7. 7. IRS Test The IRS looks at the degree of control the employer exerts over the worker and the degree of independence exhibited by the worker. The IRS considers facts that provide evidence in the following three categories: • Behavioral Control • Financial Control • Type of Relationship
  8. 8. Behavioral Control • Control over when and where the work will be done • Whether or not the employer provides instruction on how the work will be done • Whether the worker uses the employer’s or his/her own tools and equipment • Whether or not the employer provides training to the worker • How the worker is evaluated (details or end result)
  9. 9. Financial Control • Extent of unreimbursed business expenses • Extent of worker’s investment in equipment and facilities • Extent to which the worker’s services are made available to the relevant market • Extent to which the worker can realize a profit or loss • Method of payment
  10. 10. Type of Relationship • Whether or not the employer provides the worker with employee- type benefits  Insurance  Pension plan  Vacation, holiday, or sick pay • Whether or not the worker is provided a copy of the employee handbook • Whether or not the worker is engaged with the expectation that the relationship will continue indefinitely • The extent to which the worker’s services are a key aspect of the employer’s regular business
  11. 11. Fair Labor and Worker Classification • The Fair Labor Standards Act (FLSA), which governs overtime pay and minimum wages, uses a broader definition than the common law control test to define whether an individual is an employee or an independent contractor. • Generally, employee status for FLSA purposes is determined by an “economic reality test,” developed by the courts. • Employers who misclassify employees as independent contractors can be liable for unpaid minimum wages or overtime as well as liquidated damages and attorneys' fees.
  12. 12. Fair Labor and Worker Classification • The economic reality test requires an employer to examine whether a worker is economically dependent on the employer's business. • Commonly used factors to determine the status of workers under the economic reality test include:  the extent to which the worker has the right to control the result of the work and the manner in which the work is performed;  the degree to which the individual is “economically dependent” on the employer's business or, in other words, the amount of control the employer has over the individual's opportunity to realize a profit or sustain a loss;  the extent to which the services are an integral part of the employer's business operations;  the amount of initiative or level of skill required for the worker to perform the job;  the permanency, exclusivity, or duration of the relationship between the employer and the worker; and  the extent of the worker's investment in equipment or materials required for the job. • No single factor is necessarily controlling or decisive in determining whether an individual qualifies as an employee under FLSA.
  13. 13. Employment Status Under Other Laws • Workers' compensation laws do differ from other laws, in that it may be more advantageous for an employer to classify its workers as employees, because if a worker is injured on the job and is covered by the statute, he or she is prevented from suing the employer in tort law and their only method of recovery is under workers' compensation. • In general, Title VII and ADA give the same definition of the term employee: “any individual employed by an employer.” • In applying this definition in Title VII cases, the courts and the Equal Employment Opportunity Commission (EEOC) have used the common law control test to determine employee status.
  14. 14. US Supreme Court In resolving disputes under the Fair Labor Standards Act, the US Supreme Court has said that no single factor is determinative, but depends upon the whole activity. The factors the Court has considered significant include: • The extent to which the worker’s services are an integral part of the employer’s business • The permanency of the relationship
  15. 15. US Supreme Court • The amount of the worker’s investment in facilities and equipment • The nature and degree of control by the principal • The worker’s opportunities for profit and loss • The level of skill require in performing the job and the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise
  16. 16. Treated as an Employee • How you treat a worker is part of the total picture in determining his/her classification as an employee or independent contractor. • Did you give the worker an employee handbook? • Did you give the worker some employee benefits? (paid sick days, access to EAP or reduced membership to gym?) • Did you evaluate the worker using the same forms as are used for employees?
  17. 17. Use of Temporary Employees • Employment agencies hire, fire and pay the workers. • Employment agencies are responsible for withholding income and payroll taxes, paying the employer’s portion of FICA, and possibly providing fringe benefits to the workers. • The contracting company pays the agency with a vendor check. • So what could go wrong?
  18. 18. Use of Temporary Employees • Employers are still required to comply with several Federal and state employment laws. • Poorly drafted agreements with staffing agencies may leave an employer on the hook to pay for an agency’s mistake. • Temporary employees may inadvertently be affected by benefit plans and policies. • Temporary employees may have access to confidential information in performing their temporary job.
  19. 19. Use of Joint Employers A contracting company may be considered a “joint employer” depending upon the amount of control it exercises over the worker during the term of the assignment. A determination is made by looking at the entire relationship.
  20. 20. Joint Employers Factors to consider in determining if there is a joint employment relationship include: • The nature and degree of control over the worker • The degree of supervision exercised over the work • The furnishing of work space and/or equipment • The power each has to determine the pay rates or method of payment • The right each has to hire, fire or modify working conditions
  21. 21. Liability of Joint Employer • Anti-discrimination  May be liable for discriminatory treatment or hostile work environment • FMLA  Leased employees who work for a full workweek are counted toward the 50 minimum for FMLA coverage  Agency responsible for notices  Contracting employer may be responsible for accepting a leased worker returning from FMLA leave
  22. 22. Liability of Joint Employer • FLSA  Both employers are liable for minimum wage and overtime requirements • NLRA  Temporary employees from an agency may be included in a bargaining unit if they share a “community of interests”  Both employers may be held liable in an unfair labor practice • OSHA  Leasing employer will likely be liable for work-related injuries
  23. 23. Best Practices When Leasing Employees • Seek an indemnity agreement in the contract with the staffing agency so that the agency retains liability for employment-related claims and agrees to indemnify the client for any losses they may incur attributable to the actions of the agency • Contract should include a provision making the agency responsible for payment of all employment taxes
  24. 24. Best Practices When Leasing Employees • Employers should verify that the employees are covered under the agency’s workers’ compensation policy. • Employers should accommodate the needs of a worker with a disability, unless it would be an undue hardship. • Employers should ensure that leased workers are not subjected to discriminatory treatment or harassment. • Employers should review their policies and benefit plans to ensure that leased employees are not eligible for company benefits.
  25. 25. ACA Concerns Determination of employment status could: • Affect the employer’s status as an Applicable large employer. • Make the employer subject to the $2000 penalty if 95% of full-time employees are not offered coverage in 2016 • Make the employer subject to the $3000 penalty if the employer does not offer coverage • Make the employer to the reporting penalty if individual is not provided a Form 1095-C
  26. 26. IRS Voluntary Classification Settlement Program Eligibility • Are currently treating the workers as non-employees • Have satisfied Form 1099 requirements for the workers for the past 3 years • Have no current dispute with the IRS or the DOL regarding the workers’ status • Have not been previously audited by the IRS or if so, have complied with the results of the previous audit.
  27. 27. IRS Voluntary Classification Settlement Program Requirements • Employer agrees to prospectively treat the workers as employees in the future • Employer agrees to extend the period of limitations on assessment of employment taxes for 3 years beginning after the date of the agreement
  28. 28. IRS Voluntary Classification Settlement Program Benefits • Employer will pay 10% of employment tax liability that may have been due on compensation paid to workers for the most recent tax year • No interest or penalties on the liability
  29. 29. • Review all relationships with independent contractors and their duties under the guidelines for all agencies (IRS, DOL, State) • Review all contracts/agreements with leasing agencies • Review all contracts/employment agreements with individual independent contractors DO’s
  30. 30. DONT’s • Treat independent contractors as employees • Automatically refuse to address ADA accommodation requests by independent contractors • Provide assess to all of the employer’s facilities • Provide coverage for health or pension benefits
  31. 31. Questions?
  32. 32. Contact Larry Grudzien Phone(708) 717-9638 Email larry@larrygrudzien.com Site www.larrygrudzien.com

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