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Government Agencies Pull Together on Employee Misclassifications
An interesting development has been taking place in the business arena. The government agencies that typically handle separate parts of federal and state reporting are beginning to work together and "play nice." This includes agencies such as the Department of Labor, Employment Development Department, Internal Revenue Service, State Board of Equalization, Division of Workers' Compensation and OSHA, just to name a few.
As seen in a recent announcement made by Immigrations and Customs Enforcement (ICE), an estimated 500 audit notices were recently mailed to various employers. ICE confirmed that information received from other agencies was a direct result of the notices. The reason, it seems, is to have a tighter control over the classification and misclassification of employees versus independent contractors (among other violations). In 2009 the Department of Labor expressed support for establishing a joint interagency effort to address the problem of misclassification. The IRS expressed support for the recommendation and stated that coordination between departments and agencies at the state and federal levels is an effective way to encourage voluntary compliance.
Apparently, these agencies agree that misclassification of employees is a large enough problem that they want to work together to tame it. The government estimates that over 25 million dollars are lost to misclassification of independent contractors. They have agreed to work together to reduce this number and also provide greater education as evidenced by educational programs now being offered by the local EDD Workforce Development offices.
The issue boils down to this: many small businesses are classifying workers are independent contractors and issuing workers 1099 forms, when in reality, the workers are actually employees which means the employer should be paying taxes and insurance on them.
What could happen if a misclassification occurs? An employer may 1) loose their state/local licenses 2) pay back taxes including interest and penalties up to 4 years 3) be required to pay the employees portion of the taxes 4) face fines for failure to obtain appropriate worker's compensation insurance including a stoppage order. I recommend that you review the EDD's pamphlet "Paying Cash Wages Under the Table... Is it really Worth the Risk?
Employers are often times confused who is an employee and who is not. Try this check list to determine the difference between a 1099 and an employee. If
1. The worker determines when, where and how the work is performed. 2. The worker does not need training to perform the work. 3. The worker has a business license. 4. The worker provides services to others. 5. The worker sets his or her own hours. 6. The worker supplies his or her own tools, equipment or supplies. 9. The work performed is not in line with the company services offered. 10. The worker bills based on completion of a project. 11. An independent contractor agreement implemented. 12. The worker has their own insurance.
then there is a chance of the worker being correctly classified as a 1099 worker. The IRS has form SS-8 and the EDD has form DE-38 to help business owners determine if a worker is an employee or independent contractor. The key is how much control the employer has over the work of the independent contractor. If the employer sets the hours, determines when and how the work is to be completed and supplies equipment, then the worker is more likely an employee.
Don't take chances of misclassifying a worker as an independent contractor if there can be a reasonable assumption that the worker may be an employee. Misclassified workers will cost the business owners dearly if the misclassification is discovered. And with the federal and state agencies working more closely together now, the possibility is very real that any deliberate misclassification will easily be discovered.
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