employee

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

4 Ways to Protect Your Small Business from Fraud

by Fred Abramson on March 31, 2010 · 1 comment

Fraud is not limited to the Bernie Madoff’s of the world.  Because of the recession, it should come to no surprise to learn that financial problems are more likely to lead to more fraud.

Fraud is a huge problem.  According to the Association of Fraud Examiners 2008 report on occupational fraud and abuse, companies lose 7 percent of annual revenue due to this problem. The report also indicates that small businesses are more likely to be victimsthan large companies.

Small businesses are having more difficulty with fraud not only because employees have an increased workload, but also because they have less resources to stop it.

Generally fraud occurs in four primary areas.  I will provide a brief overview and let you know of ways that you can help limit your company from being a victim.

Checks

Altered checks is a major problem for businesses. What out for mistakes from payroll companies and bookkeepers.

Owners should:

  • limit the use of rubber stamps
  • have an outside accountant check your books monthly

Fraud to order

Employees can make fake orders. Check inventory to see if anything is missing.

Owners should:

  • Conduct surprise audits
  • limit access to cash
  • install security cameras

Encourage employees to report Fraud

According the ACFE study, most fraud was uncovered by co-workers.

  • Encourage tips and make sure they reach you.
  • Make it easy for an employee to report the problem anonymously.

Fake employees

This fraud is especially prevelent in the construction industry.  A foreman on a construction site mays say has ten employees and he really has 9.  He collects the 10th  paycheck for himself.  You can avoid this by:

  • handing paycheck personally
  • create a computer program to detect missing hours.

If you or your company is a victim of fraud, contact me at the Law Office of Frederic R. Abramson at  212-233-0666.

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Your employees are probably participating in social networking sites such as Facebook, LinkedIn and Twitter. But what are your workers doing on Facebook while on the clock? Are they networking or are they sharing their 5 favorite beers? On the one hand, you want to trust your employees and make them feel like they have autonomy to perform their work duties. On the other hand, you are paying them to work and you want them to present themselves professionally.

Recently, staffers of The Wall Street Journal were provided a compiled list of rules for “professional conduct” which regulates online behavior. Should your company follow the lead of the Wall Street Journal and draft a written social networking policy advising what your employees can post while working at the office? If you would like to limit potential company liability to lawsuits, the answer is yes. Here are 5 reasons why:

1. A written social networking policy may shield your Company from defamation lawsuits. What happens if your employee starts posting on Facebook untrue statements about a competitor? Without a written social networking policy, your Company could be sued for defamation.

2. Potential disclosure of Company proprietary information. Let’s say that your business has created the next killer app that will be ready to launch in 3 months. By having a non-disclosure section written into your social networking policy, your employee would be on notice and could be held liable for posting on LinkedIn such information.

3. Your business’s social networking use policy should encourage positive and constructive use of the social networking sites, as well as to prevent the use of such sites for personal or inappropriate reasons. You could be held liable for anything that your employees say of a personal nature on social networking sites.

4. Potential use in litigation. Information disseminated by your employees on social networking sites can be uncovered by a potential adversary and used against your company in litigation. Therefore, you should be clear about the type of topics that can be discussed on social networking sites.

5. Intellectual Property. Trademark and Copyright laws extend to what your post on social networking sites. Your social networking policy should make clear that your employees should refrain from posting trademarked or copyrighted material while representing the company.
So, your Company should regulate social networking use in a more expanded way than the way you regulate other Internet use. By being upfront about the potential problems of social networking, you could help both you and your employees successfully utilize this tool and avoid unwanted lawsuits.

Further Resource:

Online database of social networking policies.

Contact the Law Office of Frederic R. Abramson at 212-233-0666 for more information about social networking policies.

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