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Independent Contractor Vs Employee - The Exponential Risk Of Worker Misclassification

Independent Contractor Vs Employee - The Exponential Risk Of Worker Misclassification

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Published by Justin7Carter
appeals court decision in August 2007 ruled in favor of the plaintiff and FedEx lost its appeal of a $5.3
appeals court decision in August 2007 ruled in favor of the plaintiff and FedEx lost its appeal of a $5.3

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Published by: Justin7Carter on May 08, 2012
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Independent Contractor Vs Employee - The Exponential Risk OfWorker Misclassification
 Think twice before routinely classifying that next worker as an independent contractor or employee, orbe prepared to write the Internal Revenue Service a large check for unpaid taxes, penalties and fines,should the worker be found incorrectly classified during an audit. In addition, employers in violation ofworker classification laws should also be ready to provide retroactive access to employee benefitsprograms for incorrectly classified workers. And, if during an audit, a privately held company hasplans to go public, it could be faced with providing misclassified workers retroactive access to stockoptions as well.When it comes to worker misclassification, many have heard of the landmark United States federalclass action suit filed against Microsoft Corporation, Vizcaino v. Microsoft Corp., which helped clarifythe law nationwide regarding temporary worker classification. After years in litigation, Microsoftagreed to settle for approximately $97 million to be allocated between the thousands of people whoprovided services to Microsoft between the years of 1986 and 2000 while classified as independentcontractors or employees of third-party employment agencies. One can only imagine the amount ofresources drained from Microsoft and costs incurred from the intense legal battle.And Microsoft is not alone in the worker classification legal battle. Hewlett-Packard (Marks v. HewlettPackard Company), Time Warner Inc. (Herman v. Time Warner Inc.), Allstate Insurance Company(Equal Opportunity Employment Commission v. Allstate Insurance Company/Romero v. AllstateInsurance Company), S.G. Borello & Sons, Inc. (S.G. Borello & Sons, Inc. V Department of IndustrialRelations) and many more have suffered the consequences of worker misclassification.Perhaps FedEx Corporation's legal battle will become the newest landmark case, with approximately30 state class action suits and an Employee Retirement Income Security Act (ERISA) class actionfiled against the company; settlements are estimated by some to be $1 billion. Already a Californiaappeals court decision in August 2007 ruled in favor of the plaintiff and FedEx lost its appeal of a $5.3million verdict. The verdict resulted from a class action that claimed FedEx treated its independentcontractors as if they were employees but did not provide them with payment and benefits that full-time employees would receive. The ruling proved that the workers in question, delivery drivers forFedEx Ground, were in fact employees of FedEx and not independent contractors due to the level ofcontrol that the company exercised over them.Growing concern about the topic of worker misclassification has prompted long-term research studieson the issue. A report by the Department of Economics at the University of Missouri-Kansas City inDecember 2006 estimated that approximately $125 million in income tax was lost annually in Illinoisdue to employee misclassification. The four-year study also showed the rate of workermisclassification by violating employers increased 21 percent from 2001 - 2005.A 2007 report by the School of Industrial and Labor Relations at Cornell University concluded that thestate of New York is owed approximately $176 million in unpaid unemployment insurance taxes dueto employment misclassification for the years 2002 - 2005 in industries such as construction, finance,
 
insurance, wholesale and retail trade, and professional and technical services. Of the workersstudied, approximately 704,785 were misclassified by employers.While to some, the issue of worker misclassification is relatively new, many feel it has taken far toolong for government agencies to ensure that workers are classified correctly and that they receiveappropriate protection under the law from discriminatory practices. This lack of worker protectionalong with the pursuance by state and federal agencies to retrieve billions of dollars in uncollected taxrevenue has recently resulted in a significant amount of attention and legal action by decision-makersacross the country. For example, proceedings from the 2006 Allied Academies InternationalConference in New Orleans reported that attendees of a recent White House Conference on SmallBusiness rated independent contractor classification disputes as the most pressing small-businessissue.Likewise, Sens. Barack Obama (D-IL), Edward M. Kennedy (D-MA), Dick Durbin (D-IL) and PattyMurray (D-WA) have made fair and proper treatment of United States workers and employers aprimary concern by introducing the Independent Contractor Proper Classification Act of 2007 lastSeptember. This act will close IRS safe harbor Section 530 of the Revenue Act of 1978, a perceivedtax loophole that allows employers to classify workers as independent contractors rather thanemployees to avoid paying full taxes.To further address what is being referred to as a growing national problem, some states have beenproactive in enforcing worker rights. In February 2007, California Senator Alex Padilla introducedSenate Bill 622, meant to prohibit the willful misclassification of employees as independentcontractors. The bill was ultimately vetoed in October 2007 by California's governor, ArnoldSchwarzenegger, but growing concern about worker classification in California will likely encourage asimilar bill to be passed in the future.New Jersey, Illinois, New York and Connecticut are among states that have passed legislation toensure proper classification of workers. New Jersey's Construction Industry Independent ContractorAct (CIICA), approved in July 2007, makes violators of the law subject to severe financial and criminalpenalties that could lead to imprisonment for employers who knowingly misclassify workers. In August2007, Illinois accepted House Bill 1795, the Employee Classification Act, which mandates properclassification of workers in the construction industry. Enforced by the Illinois Department of Labor,financial penalties are issued for each violation and the agency has authority to ban violatingemployers from receiving state contracts for four years.New York Governor Eliot Spitzer issued an executive order in September 2007 to create the JointEnforcement Task Force on Employee Misclassification. The task force is comprised of theCommissioner of Labor, the Attorney General, the Commissioner of Taxation and Finance, the Chairof the Workers' Compensation Board, the Workers' Compensation Fraud Inspector General and theNew York City Comptroller, and shall coordinate the investigation and enforcement of all employeemisclassification matters for the state of New York.In effect as of October 2007, Connecticut's Substitute Senate Bill No. 931 outlines penalties forintentionally concealing employment related to workers' compensation premiums, including the

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