Introduced by congress May 8, 2014. Dealing with independent contractor(IC) misclassification.

The proposed bill would create a new definition of workers called “non- employees”.

If enacted this act would make misclassification of employees as Independent Contractors (IC s) anew Federal Labor offense. The bill would expand the federal Labor Standards Act to cover the new category of employees, Non -EMPLOYEES, and make it a prohibited act to wrongly classify workers.

The purpose of this bill would give present law more teeth and exposure in the constant battle over worker classification. The cost of misclassifying a worker as an independent contractor as opposed to an employee is that the government risks non reporting by the recipient if a 1099 is not issued. The employer benefits by not classifying the worker s an employee because of the savings related to not paying payroll taxes and employee benefits. Present law bears serious penalties for improper classification.

The bill has a number of key provisions as follows;

  1.  The bill would require notification t all workers as to how they are classified, e.g. Independent contractor or employee.
  2. Directing the employees to the Labor Department Web site to learn about employee rights.
  3. Directing employees to contact the Labor Department if the employee suspects that they have been improperly classified.
  4. The bill provides every employer must provide a written notice to all workers providing labor or service of their classification and to notify the Department of Labor if they suspect that they have been misclassified.
  5. Heavy fines will be imposed for non compliance. For each employee or other individual for failure to provide notices to them, a $1,100 first offense and $5,000 for second offence will be levied. The penalty could be assessed per employee and non employee.
  6. The Law will also pierce the corporate or LLC veil if the entities are being used to attempt to circumvent the law.
  7. Directs the Secretary of Labor to establish a misclassification web site.
  8. Authorize the Sectary to report to the IRS misclassifications, and implement target audits.

The above is a summary of the proposed legislation. The IRS and regulatory bodies are closing in on misclassified employees.

Present law designates an individual as an employee for federal employment tax purposes if the individual has the status of an employee under the usual common law rules applicable in determining employer- employee relationship, (section 3121(d) of the Internal Revenue Code). Generally, the question of whether an individual is an employee or independent contractor is one fact to be determined upon application of law and regulations in each case.

Among the factors used by courts in determining whether an employer – employee relationship exists are:

  1. The degree of control exercised over the details of work.
  2. The worker’s investment the facilities.
  3. The worker’s opportunity for profit or loss.
  4. Whether the type of work performed is part of the principal’s regular business and
  5. The permanency of the relationship.

All of the above factors are analyzed in making a determination as to whether the worker is an employee or independent contractor.

A more detailed analysis of the above criteria for determining employee-independent contractor status will be the subject of my next Blog.

In the interim you may reach out to me for additional assistance.