Workforce classification has been a hot-button issue for numerous years. Classification determinations regarding whether a worker is an employee versus an independent contractor impact liability to pay and withhold federal income tax, workers’ compensation, federal employment tax, and social security and Medicare taxes. Now Obamacare will up the ante.
In recent years, state and federal agencies, facing increased budget deficits, have expanded the oversight and enforcement of workforce classification laws. In 2010, the Internal Revenue Service (IRS) launched the National Research Program (NRP) to gather information about employment tax compliance. The IRS is close to completing 6,000 audits associated with the NRP review. While the IRS has not released the results, workforce classification has been identified as one of the principle areas of concerns.
The Wage and Hour Division of the Department of Labor (DOL), which is responsible for administering and enforcing numerous federal laws that set basic labor standards for businesses, has also increased its scrutiny of workforce classification. In the DOL’s Strategic Plan for Fiscal Years 2011-2016, the Wage and Hour Division notes that it is targeting “fissured” industries – sectors that increasingly rely on a variety of organizational methods that have redefined employment relationships, including: subcontracting; third-party management; franchising; independent contracting; and other contractual forms that result in a complicated and less transparent worker-employer relationship. The DOL has also entered into Memoranda of Understanding with several state agencies and the IRS to share information regarding misclassified employees.
Recent legislation has also raised classification stakes with steep civil penalties for misclassification and criminal enforcement against employers that intentionally misclassify workers. Perhaps the most noteworthy recent development is the Affordable Care Act (ACA). The ACA’s “shared responsibility” provision requires that a “large employer” (50 or more employees) provide health coverage to its full-time employees and their dependents. The ACA imposes a penalty on “large employers” that do not offer health coverage to substantially all full-time employees and their dependents. The shared responsibility provisions were originally set to take effect on January 1, 2014, but were eventually delayed until January 1, 2015. On February 10, 2014, the IRS and the U.S. Department of the Treasury issued the final regulations on the shared responsibility provisions, which provided an additional delay until January 1, 2016 for employers that have 50 – 99 full-time equivalent employees. January 1, 2015 remains the effective date for employers with 100 or more full-time employees.
In addition to the ACA, legislation implicating workforce classification concerns continues to emerge. For example, on June 26, 2014, U.S. Sen. Sherrod Brown (D-OH) announced the Fair Playing Field Act. The Fair Playing Act seeks to raise $5.7 billion over 10 years, enough to help fund a short-term transportation bill, while also ensuring that employers do not run afoul of workforce classification requirements. The Fair Playing Field Act would:
- – Require the IRS to clarify its rules and make distinctions between employee and independent contractor easier for employers and workers to understand.
- – End the moratorium on the IRS prospectively reclassifying workers.
- – Require employers to notify their independent contractors of their tax obligations and the workplace protections that do not apply to them and allow independent contractors who have concerns about their classification to seek a determination of their proper employment status from the IRS.
- – Permanently protect attorneys and other professionals, who may be independent contractors by choice, from being reclassified.
- – Force employers found to misclassify individuals without any reasonable basis to pay higher penalties.
In sum, it is clear that heightened scrutiny regarding workforce classification is here to stay. With the increasing crack down on workforce misclassification, we encourage businesses to review their classification policies and procedures and to consult their trusted advisors in order to minimize misclassification exposure.
For additional information, please join us for our July 22, 2014 Workforce Classification Webinar.