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.


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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Wage Garnishment: What should you do?

by Fred Abramson on March 24, 2010 · 5 comments


Wage Garnishment is a very powerful tool for either the government (most commonly the IRS), a company or an individual to collect money damages.  If you are a plaintiff in a civil action, if you obtain a judgment you may be able to have the sheriff garnish the wages of the person you are suing.

If your wages have been garnished, the court has the final say on how much money can be withheld from your paycheck. Your employer is powerless to stop your wages from being withheld.

What to do if you do not believe that you owe the money?

  1. Go to the court clerk’s office in the county where the judgment has been entered. In the file there must be an affidavit of service.  The affidavit of service will state the manner in which the lawsuit was served upon you.  In New York Civil Court, after a judgment has been entered, the plaintiff is required to file a notice of entry and an affidavit of non-military service.  The court protects people serving in the military from being subject to a lawsuit while on active duty abroad.
  2. If you have not been properly served and you have a valid defense to the underlying action, you may make a motion to vacate default.   In addition, you may make an order to show cause to have the wage garnishment removed.  It is not uncommon for some law firms to use process servers who “sewer serve.” I reported about this issue a few months back, where American Legal Service was accused by the Attorney General of sewer serving.
  3. Once in court, the judge may schedule a traverse hearing where the judge will determine whether service of process was proper.
  4. You also need to move for a motion to vacate default within one year of the judgment being entered.

What should you do if you want to garnish someone’s wages?

  1. Perform case investigation before starting your lawsuit. If the person you are suing is insolvent, it may not be worth the expense of starting an action against him or his company.
  2. You must obtain a court order.  If you are owed money, in New York you may commence in action in either Small Claim, Civil Court, Supreme Court or Federal Court.  The court where you start your lawsuit is dependent among a variety of factors.
  3. You must then enter judgement with the court.  Be aware that in most cases you can recover costs of the action.
  4. Obtain the name of the employer.
  5. Bring the judgement to the sheriff. The sheriff will garnish the wages.

The Law Office of Frederic R. Abramson practices civil litigation in New York State. If you have any questions regarding wage garnishment, contact me at 212-233-0666.

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Wage and Hour Lawsuits are Rising

March 17, 2010

Wage and Hour lawsuits are rising according to 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 […]

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Misclassification of Independent Contractors Crackdown

March 2, 2010

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 […]

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Employers with Independent Contract Workers are Targeted by the Government

February 19, 2010

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 […]

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Legal Reasons Why Your Company Should Have a Social Networking Policy

June 3, 2009

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 […]

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