Independent Contractor Vs Employee - The Exponential Risk Of Worker Misclassification

Think twice before routinely classifying that next worker as an independent contractor or employee, or be 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 of worker classification laws should also be ready to provide retroactive access to employee benefits programs for incorrectly classified workers. And, if during an audit, a privately held company has plans to go public, it could be faced with providing misclassified workers retroactive access to stock options as well. When it comes to worker misclassification, many have heard of the landmark United States federal class action suit filed against Microsoft Corporation, Vizcaino v. Microsoft Corp., which helped clarify the law nationwide regarding temporary worker classification. After years in litigation, Microsoft agreed to settle for approximately $97 million to be allocated between the thousands of people who provided services to Microsoft between the years of 1986 and 2000 while classified as independent contractors or employees of third-party employment agencies. One can only imagine the amount of resources 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. Hewlett Packard Company), Time Warner Inc. (Herman v. Time Warner Inc.), Allstate Insurance Company (Equal Opportunity Employment Commission v. Allstate Insurance Company/Romero v. Allstate Insurance Company), S.G. Borello & Sons, Inc. (S.G. Borello & Sons, Inc. V Department of Industrial Relations) and many more have suffered the consequences of worker misclassification. Perhaps FedEx Corporation's legal battle will become the newest landmark case, with approximately 30 state class action suits and an Employee Retirement Income Security Act (ERISA) class action filed against the company; settlements are estimated by some to be $1 billion. Already a California appeals court decision in August 2007 ruled in favor of the plaintiff and FedEx lost its appeal of a $5.3 million verdict. The verdict resulted from a class action that claimed FedEx treated its independent contractors as if they were employees but did not provide them with payment and benefits that fulltime employees would receive. The ruling proved that the workers in question, delivery drivers for FedEx Ground, were in fact employees of FedEx and not independent contractors due to the level of control that the company exercised over them. Growing concern about the topic of worker misclassification has prompted long-term research studies on the issue. A report by the Department of Economics at the University of Missouri-Kansas City in December 2006 estimated that approximately $125 million in income tax was lost annually in Illinois due to employee misclassification. The four-year study also showed the rate of worker misclassification 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 the state of New York is owed approximately $176 million in unpaid unemployment insurance taxes due to 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 workers studied, approximately 704,785 were misclassified by employers. While to some, the issue of worker misclassification is relatively new, many feel it has taken far too long for government agencies to ensure that workers are classified correctly and that they receive appropriate protection under the law from discriminatory practices. This lack of worker protection along with the pursuance by state and federal agencies to retrieve billions of dollars in uncollected tax revenue has recently resulted in a significant amount of attention and legal action by decision-makers across the country. For example, proceedings from the 2006 Allied Academies International Conference in New Orleans reported that attendees of a recent White House Conference on Small Business rated independent contractor classification disputes as the most pressing small-business issue. Likewise, Sens. Barack Obama (D-IL), Edward M. Kennedy (D-MA), Dick Durbin (D-IL) and Patty Murray (D-WA) have made fair and proper treatment of United States workers and employers a primary concern by introducing the Independent Contractor Proper Classification Act of 2007 last September. This act will close IRS safe harbor Section 530 of the Revenue Act of 1978, a perceived tax loophole that allows employers to classify workers as independent contractors rather than employees to avoid paying full taxes. To further address what is being referred to as a growing national problem, some states have been proactive in enforcing worker rights. In February 2007, California Senator Alex Padilla introduced Senate Bill 622, meant to prohibit the willful misclassification of employees as independent contractors. The bill was ultimately vetoed in October 2007 by California's governor, Arnold Schwarzenegger, but growing concern about worker classification in California will likely encourage a similar bill to be passed in the future. New Jersey, Illinois, New York and Connecticut are among states that have passed legislation to ensure proper classification of workers. New Jersey's Construction Industry Independent Contractor Act (CIICA), approved in July 2007, makes violators of the law subject to severe financial and criminal penalties that could lead to imprisonment for employers who knowingly misclassify workers. In August 2007, Illinois accepted House Bill 1795, the Employee Classification Act, which mandates proper classification 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 violating employers from receiving state contracts for four years. New York Governor Eliot Spitzer issued an executive order in September 2007 to create the Joint Enforcement Task Force on Employee Misclassification. The task force is comprised of the Commissioner of Labor, the Attorney General, the Commissioner of Taxation and Finance, the Chair of the Workers' Compensation Board, the Workers' Compensation Fraud Inspector General and the New York City Comptroller, and shall coordinate the investigation and enforcement of all employee misclassification matters for the state of New York. In effect as of October 2007, Connecticut's Substitute Senate Bill No. 931 outlines penalties for intentionally concealing employment related to workers' compensation premiums, including the

issuance of a stop-work order requiring the cessation of all business operations of the violating employer. And if all of the recent legislative action, lawsuits and case studies aren't eye-opening enough, employers now have more to be concerned with, as current data analysis tools on the market, already in use by several State Unemployment Insurance agencies, allow users to easily analyze the IRS 1099 abstract file with technology that searches and identifies triggers for an audit. With this technology, a user can establish criteria for queries and can target employers for an audit if, for example, a worker received only one IRS Form 1099 within one year but is paid what the agency views as high-level income. In this case, the agency might suspect that the employer was concealing full-time employment in order to avoid paying unemployment taxes. In the event that an independent contractor is reclassified to employee status during an audit, the employer is responsible for all back taxes, including employer and employee contributions and of course, applicable penalties and fines. So when classifying that next worker, be sure to ask: Employee or independent contractor? Affordable General Contractor Insurance Policies