employee or independent contractor? of worker...

Presenting a live 90‐minute webinar with interactive Q&A

Employee or Independent Contractor?Employee or Independent Contractor?Heightened Scrutiny of Worker ClassificationAvoiding Liability and Penalties Amid Aggressive DOL and IRS Enforcement

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, NOVEMBER 16, 2010

Today’s faculty features:

Douglas Weiner, Senior Trial Counsel, Epstein Becker & Green, New York

Dean L. Silverberg, Shareholder, Epstein Becker & Green, New York

Michelle W. Johnson, Partner, Nelson Mullins Riley & Scarborough, Atlanta

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Employee or Independent Contractor?Employee or Independent Contractor? Heightened Scrutiny of Worker Classification

Part One Presented by Douglas Weiner

[email protected]

November 16, 2010

NY:4662274.4

TODAY’S PRESENTATION WILL INCLUDE:

• My colleagues and I will give you a close look at the new investigative techniques

i i h i hgovernment agencies are using to heighten scrutiny of worker misclassification;

• An analysis of the possible risk and potential exposure for misclassification; and

• Assistance with assessing your current worker classifications; offering remedialworker classifications; offering remedial direction and best practices for avoiding misclassification in the future.

5

HEIGHTENED SCRUTINY

• February 18, 2010 New York Times front page article.

• “Obama administration cracking down on employee misclassification.”

• Employers who merely issue 1099s are subject to audit, tax assessments, backwages and penalties higher UI taxbackwages and penalties, higher UI tax assessments, and periodic audits.

• Federal and State agencies are focused onFederal and State agencies are focused on independent contractor investigation and enforcement.

6

SIGNIFICANT NUMBERS

• 3.4 million: Federal study concluded that number of workers werethat number of workers were misclassified as independent contractorscontractors

• 30 percent: Department of Labor estimates that up to that percentage of companies misclassify workers

7

Federal and State Task Forces Now Share Information

Previously a single agency would audit an employer with no referral to any otheran employer, with no referral to any other agency.

• State Workers Compensation• State Department of Laborp• State Unemployment Insurance• State Department of Taxation• Federal Tax• Federal Tax• Federal Labor

8

2007 – NEW YORK ANNOUNCES THE CREATION OF A JOINT ENFORCEMENT TASK FORCE TO

• Specifically remedy employee misclassification as independent contractorsmisclassification as independent contractors

• Facilitate sharing of information among tax and labor regulatory agenciesand labor regulatory agencies

• Establish a public awareness campaign• Establish a telephone hotline and email to• Establish a telephone hotline and email to

allow anonymous complaints from the publicThese Investigative and EnforcementThese Investigative and Enforcement Techniques are Now Standard Federal and State Task Force Procedures

9

State Enforcement

• Criminal PenaltiesE h d Ci il Fi d P l i• Enhanced Civil Fines and Penalties

• State and Federal Governments seek “to close the tax gap” with enhanced payroll tax collection

– Let me give you some examplesg y p

10

Current Active State Enforcement Agencies

Independent Contractor Enforcement Programs

1. New York 9. Indiana2. New Jersey 10. Iowa2. New Jersey 10. Iowa3. Connecticut 11. Ohio4. Illinois 12. Vermont5. Maryland 13. Nevada6. Michigan 14. Maine7. California 15. Colorado8. Massachusetts 16. Delaware

11

Current Active State Enforcement Agencies

Active State Enforcement Programs Cont’d

17. Kentucky18 N M i18. New Mexico19. Oregon20 P l i20. Pennsylvania21. Rhode Island22. Texas23. Washington

12

Enforcement Initiatives to Implement Wage and Hour Compliance

• US DOL Enforcement Targets:Enforcement budget is increased by $25 million 100+ more investigators and enforcement personnel are added to100+ more investigators and enforcement personnel are added to remedy employee misclassification as Independent Contractors.

• DOL Publicity Campaign- “We Can Help”: Worker and community outreach

• IRS – National Research Project – 6,000 audits over 3 yearsj y

13

WAGE & HOUR Overtime and Recordkeeping

• Review state and federal tests for independent contractor vs. employeeDOL unconvinced by job titles and descriptions

• The Solicitor of Labor was former New York Commissioner of• The Solicitor of Labor was former New York Commissioner of Labor – Task Force approach implemented on Federal level“Plan/Prevent/Protect”: Employer must:Create, implement and monitor plan to identify and remedy violations

“Openness and Transparency to Achieve Compliance’’: Employers will have to:

- Perform classification analysis of each exempt position- Implement new recordkeeping proceduresImplement new recordkeeping procedures - Share payroll records with employees

•

14

Wage Hour Compliance Required if Worker is Reclassified

• Recordkeeping

• Overtime

• Remote access including “BlackBerryRemote access, including BlackBerry time”

• meal and rest periods – state laws

15

STRENGTHENED WAGE & HOUR LAW:

The Employee Misclassification Prevention Act

• Proposed new law with organized labor and White• Proposed new law with organized labor and White House support

• New recordkeeping requirements

• Must notify employees of status/rights as employee or independent contractor (IC)

• If fail to keep records or provide notice:• If fail to keep records or provide notice: Rebuttable presumption individual is employee

• Stiff penalties for violations

• DOL must target industries for audits

• State unemployment insurance agencies must conduct auditing programs

16

New Initiatives

As the Task Force operates in its third year, a number of new initiatives are currently being undertaken to build on the work of the JTF’s first two years, including:g

(1) the establishment of an advisory council consisting of a steering committee and 5 regional advisory groups to guide the Task Force’s efforts;

(2) the commissioning of a research study to show the current depth and scope ( ) g y p pof employee misclassification and the underground economy in Massachusetts;

(3) the implementation of fraud detection technology to assist targeted enforcement by member agencies;y g

(4) the reorganization of the Task Force’s Investigative Sub-Team to streamline the investigative process;

(5) the building of an education and outreach plan to further inform workers, businesses, and municipal decision-makers about the work of the Task Force and the state’s employer compliance standards; and

(6) the development of a Task Force informational handout and a new Task Force web page, both components of the Task Force’s education and outreach strategy.

19

Recent cases in private litigation

• Maintenance worker in Illinois proves employee status wins back wages foremployee status – wins back wages for overtime

• Dancers at New York adult entertainment club gain conditional collective certification

20

THANK YOU!

Douglas WeinerSenior Trial [email protected]

Phone: 212/351-4770Fax: 212/878-8681250 Park AvenueNew York, New York 10177-1211

DOUGLAS WEINER is in the Firm’s Labor and Employment practice.He has 30 years of federal wage and hour litigation experience. Mr. Weiner:

– Provides compliance advice and counsel to employers to avoid litigationp p y g– Defends class actions in federal and state courts– Defends FLSA collective actions in arbitrations– Defends government contract investigations involving prevailing wage

requirements– Negotiates settlements of law enforcement and class and collective– Negotiates settlements of law enforcement and class and collective

actionsAs Senior Trial Attorney for the New York Regional Solicitor's Office of the U.S.Department of Labor, Mr. Weiner was the lead prosecutor for many of theDepartment’s most significant wage and hour cases.

21

E l I d d tEmployee or Independent Contractor? Heightened Scrutiny

f W k Cl ifi tiof Worker Classification

Presented byPresented byDean L. Silverberg, Esq.

Epstein Becker & Green, PC250 Park Avenue250 Park Avenue

New York, NY 10177Tel: (212) 351-4500Fax: (212) 878-8642( )

[email protected] 16, 2010

IMPACT ON YOUR BUSINESS: POTENTIAL AREAS OF LIABILITY AND EXPOSURE

Specific Exposure (for example)Specific Exposure (for example)

1 Unemployment Insurance Premiums1. Unemployment Insurance Premiums

2 Workers Compensation/Disability2. Workers Compensation/Disability Premiums

3. Wage and Hour (State and Federal)

23

THE STATE COMMON LAW STANDARD

• Traditional Common Law RulesTraditional Common Law Rules

• Judge – Made Laws

• Worker Classification Determinations Are Questions of QFact:Multi Factor AnalysisMulti-Factor Analysis Consideration of All Aspects of

the Relationshipthe Relationship

24

PRINCIPAL INQUIRIES

• Control Over Manner and Means* Control Over Manner and Means

• Method of Payment

• Equipment, Materials and Supplies

• Right to Discharge/TerminateRight to Discharge/Terminate

• Hours of Work

• Relative Nature of the Work

25

FEDERAL STANDARDS

1. Economic Realties Test

2. Combination (or “Hybrid”) Test

26

ECONOMIC REALITIES TEST

• Not what the IRS uses (More ToNot what the IRS uses (More To Come Shortly)

• “Right to Control” Found To Be• Right to Control Found To Be Overly Restrictive

• ERT: Focuses On How Economically Dependent The Worker Is On The Business Served

27

ECONOMIC REALITIES TEST: FACTORS

• Dependent/Independent NatureDependent/Independent Nature

• Portion of Income From “Putative” E lEmployer

• Skill LevelSkill Level

• Integral Part of Business or Merely Adj tAdjunct

• Intent of Parties (helpful, but notIntent of Parties (helpful, but not dispositive)

28

THE COMBINATION TEST

• “Hybrid” TestHybrid Test• Combines Economic Realties Test

With the Right-to-Control Test AndWith the Right-to-Control Test And Common Law Principles of Agency

Control Control Opportunity for Profit/Loss Investment Special Skills Required Degree of Permanence Integral Part of Business

29

UNEMPLOYMENT INSURANCE TAXES

• Quarterly Tax PremiumsQuarterly Tax Premiums

• U.I. Formula Established By NYS (E i R ti lti li d b(Experience Rating multiplied by each employer’s salary up to first $8 500 )$8,500 per annum)

• Caution: Carefully Review The U.I.Caution: Carefully Review The U.I.Forms Received Fromthe Statet e State

30

POTENTIAL U.I. AUDIT RESULTS(Examples – N.Y.S.)

1. U.I. Premiums On Behalf of All Reclassified Workers Going Back Three years

2. In Past: Where Back Premiums Paid Promptly, Generally No Fines/Penalties p y yBut Interest At 12 % per annum Compounded

31

WORKERS COMPENSATION/DISABILITY PREMIUMS

• “Big Ticket” itemsBig Ticket items

• Premiums• Premiums

• Penalties

32

WAGE AND HOUR CONSIDERATIONS

1. State: Right to ControlFederal: Eco. Realties/Hybrid

2. Minimum Wageg

3. Spread of Hours

4 O ti4. Overtime

5. Multi-Year SOL Beyond FLSA C !Coverage!

6. Potential for Fines and Criminal isanctions

– 30 - 33

TAX CONSIDERATIONS

34

NATIONAL INITIATIVES

•QETP: Questionable Employment Tax P ti E l t t hPractices: Employment tax schemes or practices that have no objective other than to avoid federal and/or state employment taxes.

•Tax Gap: The amount of tax revenue•Tax Gap: The amount of tax revenue collected versus the amount that should be collected.

Failure to collect appropriate income and employment taxes is cited as a majoremployment taxes is cited as a major contributor to the tax gap

35

NATIONAL INITIATIVES - 2007

November 2007 – IRS announces QETP InitiativeQETP Initiative

• Collaborative, nationwide program among IRS, National Association of State WorkforceNational Association of State Workforce Agencies, U.S. Department of labor, Federation of Tax Administrators and 29 state

kf i i l di N Y k dworkforce agencies including New York and New Jersey.

• Allows participating agencies to exchange audit reports and participate in side-by-side examinations, when appropriate.

• Provides, for the first time, a centralized and o des, o t e st t e, a ce t a ed a duniform mechanism for IRS and state employment tax data exchanges. 36

NATIONAL INITIATIVES

2010 National Research Project

• Most comprehensive study of worker classification since 1984.

• 6,000 employment audits during next three yearsnext three years.

• Primary focus- small businessesP i i k• Primary issues- worker classification, executive

ti d f i b fitcompensation and fringe benefits37

TAX CLASSIFICATION

Employee Versus IndependentEmployee Versus Independent Contractor

• 20 Factor Test• No one factor is determinative• No one factor is determinative• The main test is “control”

38

SAFE HARBOR

Section 530 Safe Harbor

• “Reasonable basis” for classifying worker as independent contractor may o e as depe de co ac o ayrelieve employer from penalties.

• prior audit of workers in similar positionl t di i d t ti f• long-standing industry practice of treating similarly situated workers as independent contractors

• IRS ruling or court decision• employer must treat all similarly situated

workers in a consistent mannerworkers in a consistent manner• employer must have filed 1099s

39

WHAT IS AT STAKE?

Tax Liability

• Income tax, FICA (social security) and FUTA (federal unemployment) taxes that should have(federal unemployment) taxes that should have been withheld

• Civil Penalties1 unintentional misclassification: 1 5% of wages paid1. unintentional misclassification: 1.5% of wages paid

and 20% of FICA tax.2. Failure to report compensation of Form 1099: 3% of

wages paid and 40% of FICA tax.wages paid and 40% of FICA tax.• Interest compounded daily at the short-term

applicable federal rate.State taxes and penalties• State taxes and penalties.

40

EMPLOYEE BENEFIT PLAN CONSIDERATIONSCONSIDERATIONS

41

IMPACT ON EMPLOYEE BENEFIT PLANS

• Affects maintenance and operation of all types of employee benefit plans

• Covering workers who are not “employees”Covering workers who are not employees places the tax-favored status of the plan at risk

E l di f ti i ti k h• Excluding from participation workers who are eligible “employees” can place the tax-favored status of the plan at risk, and give rise to p , gclaims for benefits

42

THE “MICROSOFT CASE”

• Vizcaino v. Microsoft, 9th Circuit of Appeals, 199719971. Microsoft hired independent contractors

who signed agreements acknowledging that they would not be eligible for benefitsthat they would not be eligible for benefits under Microsoft’s plans.

2. IRS in tax audit, determined that the independent contractors were misclassifiedindependent contractors were misclassified and were common law employees.

• Court held that since the company’s plans provided that any common law employee is eligible to participate in the plan, the misclassified workers were entitled to benefits under Microsoft’s plansunder Microsoft s plans.

43

SO WHAT DO YOU DO?

• Employers not precluded from including plan l t l d t i f i di id l flanguage to exclude certain groups of individuals from participation

• Plan “Fail-Safe” Language

• Expressly define terms and exclude independent t tcontractors

• Contractors excluded from plan participation, even if subsequently reclassified as a common-even if subsequently reclassified as a common-law employee

44

SO WHAT DO YOU DO?

Example of this type of language:• “If an individual not classified by the Company

or a Participating Employer as an Employee is retroactively reclassified as such by any governmental or regulatory authority, such individual shall nonetheless be deemed to have become an Eligible Employee only prospectively on the event of such reclassification (and not retroactively to the date on which he was found to have first become an employee for any other purpose), and then only if he otherwise satisfied the requirements of this Section.”q

45

PROSPECTIVE EXCLUSION

• Employees may be categoricallyEmployees may be categorically excluded

• But need to ensure you will pass• But, need to ensure you will pass applicable Code coverage testing requirementsrequirements

BLUE 46

ACKNOWLEDGEMENT OF EXCLUSION/ WAIVER OF PARTICIPATION

• Microsoft court did not give much weight to executed waivers but other courts haveexecuted waivers, but other courts have

• Waiver is not a substitute for clear, consistent plan/SPD languageconsistent plan/SPD languageState that the worker is ineligible to participate in plans

• Acknowledge that the exclusion applies retroactively, even if reclassified as a common-law employeeco o a e p oyee

• Openly communicate waiver to worker; take no coercive action with respect to its execution

RED 47

IF WORKERS HAVE BEEN MISCLASSIFIED UNDER RETIREMENT PLANS

• Rev Proc 2008-50: IRS Employee Plans p yCompliance Resolution System (“EPCRS”)

1. Self Correction Program (“SCP”)

2. Voluntary Correction Program (“VCP”)

3. Audit Cap – Correction on audit

-30- 48

PARTING WORDS

Be Careful Out There!!Be Careful Out There!!

49

Employee or Independent Contractor?Employee or Independent Contractor?Employee or Independent Contractor?Employee or Independent Contractor?Heightened Scrutiny of Worker Heightened Scrutiny of Worker

ClassificationClassificationClassificationClassification

BEST PRACTICES TO LIMIT LIABILITYBEST PRACTICES TO LIMIT LIABILITYBEST PRACTICES TO LIMIT LIABILITYBEST PRACTICES TO LIMIT LIABILITY

Presentation for Strafford Publications byMichelle W. Johnson

Nelson Mullins Riley & Scarborough LLP

Atlantic Station201 17th Street NW, Suite 1700

Atlanta, GA 30363-1017(404) 322-6167( )

[email protected] 16, 2010

SelfSelf--Audit Independent Audit Independent Contractor Practices to Contractor Practices to

Ensure Proper ClassificationEnsure Proper ClassificationEnsure Proper ClassificationEnsure Proper Classification

51Nelson Mullins Riley & Scarborough LLP

Ten Questions to Help Determine Whether Ten Questions to Help Determine Whether Contractors Are Properly ClassifiedContractors Are Properly Classified

Have all independent contractors signed written independent contractorwritten independent contractor agreements?

Are the contractor's duties integrated with core business operations, or does he or she perform non-essential business activities?



Does the contractor provide full-time services to you, or does he or she work for y ,other companies also?

D th t t i l Does the contractor receive employee benefits such as insurance coverage or paid time off?paid time off?



Must the contractor's services be performed on-site, or during specific hours?

M t th t t ' i b Must the contractor's services be performed personally?



Does the contractor do the same job as or work side by side with companywork side by side with company employees?

Does the contractor have a supervisor who directs his or her work, or does the contractor supervise company employees?



Is there a non-compete agreement that would prevent the contractor from providingwould prevent the contractor from providing services to other employers?

Is the contractor expected to attend company meetings or periodic or ongoing t i i t d d th d ttraining as to procedures and methods to be used?


Protect Your Company WithProtect Your Company WithProtect Your Company With Protect Your Company With a Wella Well--Drafted Independent Drafted Independent

Contractor AgreementContractor Agreement


Ten Essential Elements of an Independent Ten Essential Elements of an Independent Contractor AgreementContractor Agreement

Limit agreement to a specific term or j t th t t t ti ll llproject that cannot automatically roll over.

Provide that contractor shall determine how, when, and where the work will be done.


Sample ProvisionSample ProvisionSample ProvisionSample Provision

Method of Performing Services Contractor will furnish Method of Performing Services. Contractor will furnish all labor and equipment necessary to perform the work, and shall solely control the means, manner and method of performance; subject, however, to the terms and conditions of this agreement. The Company shall, however, be entitled to exercise general power of , g psupervision and control over the work to assure satisfactory performance, including the right to inspect, the right to stop work the right to make suggestions orthe right to stop work, the right to make suggestions or recommendations, and the right to propose modifications.



State that contractor may provide the same or similar services to othersame or similar services to other companies while the agreement is in effecteffect.

Explicitly acknowledge that independent t t l ti hi i t d th tcontractor relationship exists, and that

contractor will pay his or her own taxes.



Relationship Between the Parties The relationship between the Relationship Between the Parties. The relationship between the parties shall be that of independent contractors under Georgia law, and not of employer-employee. In all public records, in its relationship with others, and in any documents, Contractor shall p , y ,clearly indicate the independent ownership of Contractor's business and that operations of said business are separate and apart from the operations of the Company's business. Contractor will not be treated as an employee of the Company for purposes of state or federal anti-discrimination laws, the Fair Labor Standards Act, the Federal Income Contribution Act, the Social Security Act, the Federal Unemployment T A t I T Withh ldiTax Act, nor Income Tax Withholding.



Relationship Between the Parties (cont'd). Contractor is responsible for the payment of estimated income and self-employment taxes. Contractor further agrees to indemnify and hold harmless the Company for any liability with the Internal Revenue Service or any state tax agency, as well as local laws and regulations

di th t f h t i f lf l tregarding the payment of such taxes on income from self-employment and wages paid its employees.



If possible, require that contractor provide own tools and equipmentown tools and equipment.

Spell out that contractor is not covered by ' li bilit h lth kcompany's liability, health, or workers

compensation insurance, and receives no th l b fitother employee benefits.



No Benefits. Contractor shall not be entitled to participate in health or disability insurance, retirement benefits, or other welfare or pension benefits (if any) to which employees of the Company may be entitledCompany may be entitled.



Require that contractor be responsible for his or her own expenseshis or her own expenses.

If appropriate, require that contractor add company as additional insured on contractor's liability insurance policies.



Insurance Contractor agrees to purchase "occurrence" Insurance. Contractor agrees to purchase occurrence based commercial general liability insurance with a limit of liability of at least $1,000,000 per occurrence and a

$general aggregate limit of at least $2,000,000. The Company, its officers, directors, and employees shall be included as additional insureds. In addition, Contractor ,will maintain automobile liability insurance for all owned, non-owned, and hired vehicles with a limit of at least $1 000 000 combined single limit for bodily injury or$1,000,000 combined single limit for bodily injury or property damage. The Company, its officers, directors, and employees shall be named as additional insureds on

h lisuch a policy. 66

Nelson Mullins Riley & Scarborough LLP


Pay for tasks accomplished rather thanPay for tasks accomplished rather than hours worked.

Provide for indemnification by contractor Provide for indemnification by contractor for taxes owed, workers compensation claims discrimination claims tort liabilityclaims, discrimination claims, tort liability.



Indemnification The Contractor shall indemnify and Indemnification. The Contractor shall indemnify and hold harmless Company and its officers, directors, and employees, for any claims brought or liabilities imposed against the Company by Contractor or by any other party (including private parties, governmental bodies and courts) including claims related to Workers' ) gCompensation, wage and hour laws, discrimination, employment taxes and benefits, and whether or not related to Contractor's status as an independentrelated to Contractor s status as an independent contractor. Indemnification shall include any and all losses, including costs and attorney fees.


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