IRS and Department of Labor to Crack Down on “Improper” Use of Independent Contractors

Many businesses today use independent contractors in addition to, or even instead of, traditional employees. There are many situations in which this arrangement makes sense and is valuable to both parties. However, lately the IRS and the Department of Labor have begun to take a closer look at these arrangements and in some cases penalize businesses for classifying their workforce as contractors rather than employees. An article just published on Forbes.com explains:

Does your workforce include “contract laborers”, “freelancers”, “casual workers”, “contract employees”, or independent contractors by any other name?  If so, then you will want to pay attention to the increasing possibility of claims provoked by treating workers as non-employees under applicable wage-hour laws, particularly under the federal Fair Labor Standards Act and other, analogous federal provisions.

One of the highest priorities at the U.S. Labor Department is to identify situations in which workers are erroneously considered not to be employees or other covered individuals for purposes of complying with minimum-wage, overtime, and recordkeeping requirements and child-labor restrictions of the FLSA and similar federal wage laws it enforces.  The agency calls this its Misclassification Initiative, and these efforts have resulted in significant liability, such as:

  • A consent judgment for $1.3 million against a nationwide provider of directory assistance and other information services that supplied its services through workers whom it considered to be independent contractors;
  • A $105,000 overtime assessment against a Texas employer that had considered workers to be independent contractors for their first 90 days with the company;
  • A $101,000 demand against a Virginia employer that had considered individuals performing work on a government-funded construction contract to be independent contractors or to be subcontractors.

Many other USDOL misclassification investigations are underway across the country.  Moreover, USDOL has entered into alliances to promote enforcement and information-sharing with the U.S. Internal Revenue Service and with officials in 14 states (so far).

As you can see, these misclassifications can be very expensive. But what does the government consider while determining the proper status of a worker? Below are several criteria:

The extent to which the person’s work is controlled by the alleged employer;

Whether and to what extent the individual has any investment in the necessary facilities, equipment, supplies, etc.;

Whether and to what extent the individual has opportunities for profit or loss in a business sense;

The extent to which the person uses any initiative, judgment, or foresight from an entrepreneurial standpoint;

Whether the relationship is permanent or indefinite, as opposed to being temporary or for a definite duration;

If you own a business and utilize independent contractors, it is important that you pay attention. Improperly classifying your workforce could be a very expensive mistake. If you’d like to learn more, or if you’d like guidance determining the best course of action for your specific situation, we would be glad to help.

And if it’s too late, and you already find yourself engaged in a dispute with the IRS, we can help resolve the matter. Give us a call today!