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Risk Management Challenges for 2010

Insight into the misclassification of workers and emerging strategies for business to effectively mitigate associated risks of worker misclassification.

Companies have to decide what degree of risk is appropriate for their organization and take proactive steps to review current and future programs to avoid unwanted litigation. This may include a collaborative review of HR practices, contractual or indemnification review, and new programs offered by best in class companies to provide a compliance firewall to include audits of suppliers and contractors. Many companies may escalate a review of labor law changes or strengthen programs that span labor law, immigration or compliance programs. These approaches are common sense in the face of increased enforcement by State and Federal agencies that will include higher profiles of regulatory watchdog agencies and the undesired outcome of having unwanted public exposure for companies that did not heed the call to action.

Advantage Resourcing provides staffing and outsourced managed services programs for our North American and global clients as the seventh largest global staffing and solution provider per industry rankings. A core offering includes programs to provide risk management and Business Process Outsourcing for our clients in countries we operate. This includes programs to mitigate risk for HR & Tax law compliance, local labor laws for overtime, minimum wage and tenure limitations. For 2010 it will be critical for public and private companies to review current around worker misclassification, labor law and programs to deliver a compliance firewall in the face of new laws and enforcement actions.

Risk Management Challenges for 2010


Growth of Contingent Labor in the United States

As jobless claims and layoffs have increased, a job for life has become a legacy of a former generation. Today we see Fortune 500 companies using contingent labor as part of a strategic flexible workforce strategy that protects full time workers from seasonal layoffs that provides flexibility for companies in meeting seasonal or peak demands. At a recent Staffing Industry Analyst Executive Forum, it was discussed that the percentage of contingent workers making up the current workforce of Fortune 500 companies is 1012% of the total workforce, with a trend to 20% a possible outcome for the future. While the increase of contingent labor provides a cost savings of 9% for companies increasing their percentage of contingent workers versus permanent employees, the real issue facing the US Government is worker misclassification. One federal study concluded that employers illegally passed off 3.4 million regular workers as contractors, while the Labor Department estimates that up to 30 percent of companies misclassify employees.

contractors, often due to genuine confusion over conflicting government rules and court decisions in this area.

New York States Joint Enforcement Task Force on Employee Misclassification (Task Force), formed in 2007, continues to

One federal study concluded that employers illegally passed off 3.4 million regular workers as contractors, while the Labor Department estimates that up to 30 percent of companies misclassify employees.
However, the motivating factor is sometimes an effort to avoid overtime pay requirements, payroll-related taxes, employment benefits and other obligations. address, among other things, the problem of employers who inappropriately classify employees as independent contractors. Ohios attorney general estimates that his state has 92,500 misclassified workers, which has cost the state up to $35 million a Many state governments and Federal government bodies are recognizing that misclassifying workers as independent contractors denies the workers protections under the wage and hour laws, precludes such benefits as workers compensation and unemployment insurance payments, and denies protection under some nondiscrimination laws. In response, these government entities are enacting new legislation and stepping up enforcement of existing regulations to ensure that workers are properly classified and protected. One federal study concluded that employers illegally passed off 3.4 million regular workers as contractors, while the Labor Department estimates that up to 30 percent of companies misclassify employees. year in unemployment insurance taxes, up to $103 million in workers compensation premiums and up to $223 million in income tax revenue.

In early June 2009, Colorado enacted new laws that impose harsh penaltiesup to $5,000.00 per employee for a first offense

Government Audits and Federal Scrutiny to Increase in 2010.

Beginning in 2010, the IRS will launch an audit initiative that will audit the federal tax returns of 6,000 companies to assess compliance with tax and labor regulations. As part of this audit, the IRS will examine independent contractor misclassification. The initiative was prompted, in part, by advice from the United States Government

What does this mean to the State and Federal Government and to public and private businesses?
Many companies have historically misclassified employees as independent

and up to $25,000.00 per employee for subsequent violationson employers that misclassify employees as independent contractors. Maryland has instituted a Workforce Fraud Act, which went into effect in October 2009.

Risk Management Challenges for 2010


Accountability Office to the IRS and United States Department of Labor to step up efforts to reduce the misclassification of independent contractors.

Business Strategies for 2010

As part of normal business practices, a review of current practices to review the use of various worker categories to manage the workforce lifecycle is warranted.

Changes in the Office of Federal Contract Compliance Programs (OFCCP) enforcement represent some of the most dramatic changes in employment law this year. Employers who were not previously affected by the OFCCP may face audits or record-keeping requirements in 2010. Increases in government budget, changes in organization, political transformation, and tracking of stimulus funds will result in an overall increase in OFCCP activity, making it an employment law issue employers cannot afford to ignore. Common sense programs may include: Independent Contractors / 1099s: Review policy for use of independent contractors and classification standards to ensure that internal or outsourced programs can meet audit standards or State and Federal standards Staffing Company Worker Roles & Worker Comp Classifications- a key area of industry focus to ensure that workers are classified appropriately Evaluation of outsourced partners and indemnification standards Fair Labor Standards Act (FLSA) compliance for employers and staffing company vendor management to enforce Federal minimum wage, overtime, child labor and recordkeeping requirements. Review of Work Permits and Visas for North American clients traveling to support business needs to avoid immigration law violations Managed Services Program Audits: Review of MSP programs and audits for I-9s; drug and background standards and a workers right to work in the key country assigned Random supplier and worker audits to monitor minimum wage, overtime and statutory payments or for FLSA compliance

2011 Federal Budget Allocation and Enforcement Activities

President Obamas fiscal 2011 budget allocates substantial funding to help the Department of Labor and the Internal Revenue Service combat employee misclassification, both as to independent contractors and overtime exempt employees. Hundreds of investigators will be hired to pursue a misclassification initiative to obtain for misclassified employees overtime pay, social security contributions, unemployment benefits, health and welfare benefits and retirement benefits provided to employees but not independent contractors. According to the Presidents budget report, enhanced enforcement is expected to increase Treasury receipts by more than $7 billion over ten years. In addition, facing similar budgetary constraints, many states are stepping up their enforcement efforts in this area as well. Inadvertent misclassification is a genuine concern for many employers because state and federal agencies have applied different standards for employee classification.

References: 1. Eric H. Rumbaugh, Esq.; Michael Best & Friedrich LLP; 100 East, Wisconsin Avenue, Suite 3300; Milwaukee, Wisconsin 53202 2. IRS & US Department of Labor websites 3. Staffing Industry Analysts (SIA) 4. California Department of Industrial Relations 5. NY State Department of Labor Misclassification_TaskForce_AnnualRpt_2008 6. NY Times Feb17, 2010 Article: US Cracks Down on Contractors as a