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Wage & Hour Law Update

IRS Signs Memorandum of Understanding With USDOL Focused On Worker Misclassification And Offers Amnesty Program

Of continued concern to governmental agencies – departments of labor, taxing authorities, workers compensation and unemployment boards – is the classification of workers as “independent contractors” and resulting exclusion of (and lost revenue from) such individuals from coverage under tax, benefits and wage statutes. Periodically, such agencies seek to coordinate their enforcement efforts with respect to misclassification, such as the Joint Enforcement Task Force on Employee Misclassification convened in 2007 by former New York Governor Eliot Spitzer. Earlier this month, the Internal Revenue Service and U.S. Department of Labor announced that they have entered into a memorandum of understanding to “improve departmental efforts to end the business practice of misclassifying employees in order to avoid providing employment protections.” The DOL also announced it had reached similar agreements with several state agencies.

This cooperative arrangement was followed shortly by a separate IRS announcement of a new Limited Amnesty Program for underpayments of federal employment taxes due to alleged misclassification. Under this program, an employer is eligible if it is: (a) not currently being audited by any federal or state agency regarding worker classification; (b) has consistently treated the subject workers as non-employees; and (c) has filed all required Form 1099s for the workers for the previous three years. An employer meeting those criteria can, through the program, voluntarily pay 10% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, without any additional interest or penalties. However, the employer must enter into a “closing agreement” with the IRS which, among other provisions, extends the statute of limitations for collecting back taxes (from three to six years) during the first three years following entrance into the program. The tax “amnesty” offered by the program, of course, does not extend to the bevy of other laws potentially applicable to the acknowledged misclassified contractors

“Coordination of misclassification enforcement efforts by governmental agencies is not a new concept,” notes Jackson Lewis tax partner Bruce Schwartz. “Unfortunately, none of the agencies has been able to provide a bright line definition for determining whether a worker is an employee or independent contractor and certain laws – for example, unemployment compensation laws – may use a definition of employees that is broader than the common law definition used by the IRS. Nevertheless, businesses should be aware that worker classification determinations made by government agencies usually have the presumption of being correct. Companies need to take this into account determining their business model in using employees and/or independent contractors.” 

These continued government initiatives coupled with the growth of class and collective wage and hour claims based on worker misclassification make it vital for all businesses to closely review their classification process and practices, particularly if contemplating participation in a government “amnesty” program, such as the one outlined above. Simply calling one a contractor, whether the individual requests or agrees to such classification, is not a legal defense, and neither is the participation in a voluntary program applicable to a particular statute.