Worker Classification and Compensation:

Truth or DareKathleen Barrow, PartnerJackson Lewis LLP

1415 Louisiana, Suite 3325Houston, Texas 77002

(713) 568-7847barrowk@jacksonlewis.com

© 2012 Jackson Lewis LLP

Defining the Issue

1st Quarter 2010, IRS commences the “Employment Tax National Research Project:• Employment tax audit program focusing on

worker classification• 6000 random audits of companies from 2011-

2013• New tools developed to aid in identification of

worker classification issues

Defining the Issue

March 16, 2011, Statement of Hilda L. Solis, Secretary of Labor to the Subcommittee on Labor, US House of Representatives• Characterizes employers who misclassify

workers aso Avoiders of minimum wage and overtime lawso Evaders of payroll taxeso People who seek to deny workers of the protection

of health and retirement benefits, workers’ compensation and unemployment compensation

Federal Statistics Relied Upon by IRS and DOL

Up to 30% of employers misclassify workers3.4 million workers are contractors, when they should be employeesRevenue loss to US Treasury is $3.4 billion, annually• Income tax• Social Security• Medicare• Unemployment Insurance Trust Fund

What IRS is Doing (other than the 6000 audits)

Form SS-8s sent to self-employed individuals who receive Form 1099Questionnaires to sponsors of employee benefit plansInformation sharing with DOL, state unemployment and taxing agencies• Form 211- Whistleblower Program

o Up to 30% of tax, penalty and interest recovery for individual transactions $200,000 or more and corporate transactions of $2 million or more

o Up to 15% of tax, penalty and interest for lesser transactions

What the DOL is Doing

129 FTEs for multi-agency audit and enforcementWage and Hour hires 107 new investigators for targeted industry investigations$24.7 million to fund state grants to identify worker misclassification issues in state unemployment insurance administration and facilitate information sharing with DOL

More DOL Initiatives

OFCCP allocates $3.6 million and 11 FTEs to address misclassification in government contract operation Office of the Solicitor allocates $1.4 million and 7 FTEs to bring multi-state litigation against large employers determined to “abuse” independent contractor statusOSHA adds 2 FTEs to train inspectors on worker classification issues

Worker Misclassification Issues

Employment tax liabilityMinimum wage and overtimeUnfair labor practices liabilityViolation of terms of government contracts as to prevailing wage, etc.Employee benefit plan operational failures• Tax liability• Benefit liability

Federal Tax Exposure

Employment tax liability• Past federal payroll taxes (3 years back, or more)• State payroll taxes• Up to 100% penalty—if willful failure• Income tax not withheld• Trust fund recovery penalty for responsible

persons

Section 530 Relief

Employer has properly filed all tax and informational returnsEmployer has consistently not treated workers in job as employeesEmployer reasonably relied upon• Consistent and widespread industry practice• Attorney advice• Prior judicial or administrative precedents

FLSA Exposure

Minimum wage/over time (up to 6 years)Liquidated damages (100% penalty)Application of damage model to all workers in same job, not just individual workerDOL supervision over payment of wagesAttorneys’ fees and costs

Employee Benefit Plan Exposure

Welfare plans• Premium costs• Lost benefits• Loss of tax benefits for certain

employee/participants401(k) plan• 50% of average elective deferral for all years of

eligibility• Matching contributions• Investment earnings (average)• Correction with DOL and IRS for plan failures

Classification Tests

Common law—23 factor testFLSA- “economic realities” testIRS• Behavioral controls• Financial controls• Type of Relationship

IT ALL REALLY BOILS DOWN TO…

THE “JOE THE PLUMBER” TEST!

Questions?

Thank you for your kind attention!

Speaker

Kathleen R. Barrow, PartnerJackson Lewis LLPThe Wedge International Tower1415 Louisiana, Suite 3325Houston, Texas 77002(713) 568-7847barrowk@jacksonlewis.com