Business Law

Employer Misclassification May Become a Crime

by Fred Abramson on April 29, 2010 · 0 comments

I have written extensively about the potential problems employers can have by misclassifying their workers as employees.  The IRS has been cracking down on companies that try to pass off regular employees as independent contractors. It now may become a crime.

Congress is about to act on a bill entitled the Employee Misclassification Prevention Act that would impose criminal penalties on companies that misclassify workers. It appears that both the House and Senate is behind the bill, so it is likely to become law.

If this new law is passed, it would impose finds of $5,000.00 for each worker that is misclassified as an independent contractor. According to the American Bar Association Journal, the new law would also require employers to provide new hires with notice concerning their rights

There is an excellent and lengthy article on the subject by the large law firm Pepper Hamilton, LLP.

The new law is a natural progression of the Obama administration focus on cracking down on employers who improperly classify employees as independent contractors.

I would suggest that companies review all of their employment classifications to avoid potential criminal liability. You may be able to minimize the risk to your company by:

  • Wholesale review of all of your workers.
  • Restructuring the relationship that you have with your independent contractors that fall within a gray area of the law by re-classifying them as employees. I would suggest that you should err on the side of caution and classify your workers as employees if you are not sure.
  • Draft written agreements with all of your workers stating their employment status.
  • If you want to limit the workers that you classify as employees, you may have a third-party such as a staffing agency performing the hiring.

If you have any questions regarding independent contractor agreements or classification of employees, contact me at the Law Office of Frederic R. Abramson at 212-233-0666.

I have a technology company as a client who recently retained my office to advise them on a relatively common employment law. The company signed a contract with financial institution to perform help desk related work.  They hired ten people to perform the work and had each of them sign an independent contractor agreement.  All of the workers performed the work on the job site only. The all worked solely for the technology company for 40 hours a week. The company just received an evil notice from the IRS. The IRS believes that the workers are misclassified as independent contractors and should be employees.

The technology company now wonders if there are penalties for misclassifying the workers as an independent contractor.  The IRS looks in part at the intent of the employer.  If the IRS reclassifies a worker from independent contractor to employee, the employer may be liable for a penalty based on the amount of the tax that was not withheld because of the original misclassification. If the IRS finds that the misclassification was an honest mistake on the part of the employer, and the employer filed proper returns, the penalty against the employer is:

• 1.5% of the wages paid to the employee; and

• 20% of the amount that should have been withheld from the employee’s wages for FICA, but was not due to the misclassification.

If the IRS finds that the employer failed to file the proper returns, then, except where the failure is due to reasonable cause and not willful neglect, the penalties double. Then, the penalties are:

• 3% of the wages paid to the employees; and

• 40% of the amount that should have been withheld from the employee’s wages for FICA, but was not.

If the misclassification on the part of the employer is intentional and therefore the employer intentionally neglected to withhold the necessary employment taxes, the limits discussed above do not apply in assessing the employer’s liability. The penalties for intentional misclassification are more severe. Moreover, the limits are not applicable to the employee’s share of the FICA taxes if the worker is a “statutory employee,” nor where the employer withholds federal income tax from the worker’s wages, but does not withhold FICA.

Lastly, if the required to pay an “employee reclassification” tax liability, the employer may not recover the tax assessed from the employee. In addtion, the employer may not deduct the amount of tax assessed from the employee’s wages. The Internal Revenue Code provides further that the employee’s liability for his or her share of the tax is not affected by the assessment or payment of the penalty tax by the employer.

If you have a legal question regarding independent contractors in New York, contact the Law Office of Frederic R. Abramson at 212-233-0666

Wage and Hour Lawsuits are Rising

by Fred Abramson on March 17, 2010 · 0 comments

Wage and Hour lawsuits are rising according to Kiplinger.com. Due to the faltering economy, workers who have been let go are looking to the courts to seek monetary damages.  Usually the lawsuits are based upon allegations that hourly workers are not paid overtime. This is a violation of the Federal Labor Standards Act.

According to the article, New York was one of the states that has seen the most significant growth in Wage and Hour lawsuits.   Among the reasons why there have been an increase in litigation is because these cases are relatively easy to win.  The proof is in the numbers.  If you are a worker, you simply have to prove that you worked overtime.  This is usually evidenced by a time sheet.  Large employers also keep records of employees hours.  If the workers paycheck doesn’t match the hours worked, the worker wins.  Awards can include two to three years of back pay plus benefits.

The Obama administration is also placing a greater emphasis on regulation and enforcement.  As a result, more workers are being notified of Wage and Hour violations.

Here are a few ways that a business can protect itself from Wage and Hour lawsuits:

  • All worker classifications should be reviewed. Make sure that you are properly classifying any independent contractors.
  • Review all worker wages.  Sit down with an attorney to see if you workers are being properly paid. This could save your company millions of dollars.  Wal-Mart settled a $65 million dollar claim last year.
  • Speak to and train all of your supervisors.  Managers often demand workera to work overtime without knowing its implications.
  • If there is a problem don’t ignore it.  If an employee complains that she has not been paid overtime, take it seriously. Wage lawsuits can be just as costly as sexual harassment litigation.
  • Make sure your employee handbook is up to date and addressses wage and hour issues.
  • Be aware of the difference between employees who are paid salaries and hourly workers.

Another tip, as Rush Nugut points out is that a business should consider hiring a lawyer during the auditing process as to keep the attorney-client privledge.

I would also like to thank Craig Roberts for his insights regarding this issue while watching our children slide on giant inflatables at a Pump it Up party in Plaiview, Long Island.

If you have any question regarding Wage and Hour Lawsuits, whether you are an employer or employee, contact the Law Office of Frederic R. Abramson at 212-233-0666.



Misclassifying an an employee as an independent contractor is one of the most expensive mistakes that a business owner can make. It does not matter whether you intentionally made the mistake. You can be subject to large penalties, fines and even subject the criminal liability.  I have recently reported that the IRS has been targeting employers with independent contract workers.

The problems don’t end with the employer. Misclassified workers can lose:

  • Worker’s Compensation Insurance
  • Unemployment benefits
  • Wage protection such as minimum wage and overtime.

Employers who hire independent contractors have an unfair advantage because labor costs less and they could charge less for their goods and services. If you are in the construction industry, a competitor who improperly misclassifies their workers as independent contractors can underbid you.

The employer who gets caught with improperly classifying workers as independent contractors can be subject to liabilities for:

  • Unpaid Federal, State and Local Income Tax withholdings
  • Social Security and Medicare contributions
  • Workers’ Compensation Premiums
  • Overtime
  • Unemployment compensation
  • State-mandated benefit programs

Audits

The New York Department of Labor conducts two types of audits, general and specific. The general audits are conducted randomly with nothing specific as its subject. It is interesting to note that these audits are not statistically random as specific industries, such as construction are heavily targeted. Specific groups are the subject to targeted audits as well, which are based on a variety of factors, including prior issue with improper classification. The Cornell Law Institute performed an excellent report about the misclassification of independent contractors in New York and is a great resource.

Prevailing Wage Duties

On publicly funded construction projects, some companies use missclassification as a way to avoid paying prevailing wage rates.  A company that is caught can be subject to paying restitution to affected employees, fines for failing to maintain payroll and general records and submit valid and certified records.

Conclusion

Due to the increased scrutiny on the use of independent contractors, employers, especially those in the construction industry need to focus on how they classify their workers. You should conduct audits internally with legal counsel to determine if their are any issues.

If you have any questions regarding the classification of independent contractors, contact me at the Law Office of Frederic R. Abramson at 212-233-0666.

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According to the New York Times, the IRS is cracking down on companies that try to pass off regular employees as independent contractors. More than two dozen states are cracking down on employers that improperly claim regular employees as independent contract workers. The federal government believes that enforcement could yield $7 billion during the next decade.

Among the most often misclassified workers are truck drivers, construction workers, home health aides and high-tech engineers.

As an independent contractor, there is no employer-employee relationship with the person or company that you are doing business with.  The independent contract is a consultant who performs specific duties that the consultant is capable of performing.

At the start of the relationship, it is absolutely vital to have an independent contract agreement (also known as a consulting agreement) drafted to protect both parties.  The consequences of failing to establish a consultant as an independent contractor can have dire tax consequences.

In your independent contractor agreement, it is important to establish that the consultant performing the services  is not under the control of the employer.  In addition, the employer may not directly supervise the consultant.

When it comes time to draft an independent contractor agreement, you should focus on the fee for services rendered and provide a complete description of the services that are to be provided.

According to IRS, you should be aware of the following common law factors when it comes to providing evidence as to degree of control:

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

If you have a legal question regarding independent contractors in New York, contact the Law Office of Frederic R. Abramson at 212-233-0666

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