To Be or Not To Be...An Employee
While the issue of employee vs. independent contractor is hardly a new one, the perils of misclassification have never been greater for businesses. Liability can arise in any one of several different areas, including state and federal taxes, minimum wage and overtime compensation, employment discrimination, workers compensation, health and retirement plan coverage, unforeseen unionization and vicarious liability to third parties for the acts of an agent.
Most recently, the Internal Revenue Service, the Michigan Unemployment Insurance Agency and the United States Congress have each weighed in on the issue. The IRS has announced plans to step up audit activity on small business tax returns, and with them, an intent to scrutinize carefully any purported independent contractor relationships. Where it finds a misclassification, the Service will likely assess liability for unpaid FICA and Federal Unemployment Taxes, as well as potential back tax liability, interest and penalties for failures to withhold income tax.
Similarly, the UIA's new Director, Steve Geskey, announced to a gathering of the Michigan Association of CPAs on November 6 that the State Agency, too, will be taking a much closer look during its audit activity at relationships characterized as independent contractor relationships. That scrutiny will also be brought to bear on employer businesses when claims for unemployment benefits are filed by any "independent contractors" who list those employer businesses as payors of base period earnings. Here again, the specter of liability for back taxes, interest and penalties arises.
Beyond these investigative initiatives, there is apparently also a movement afoot in Washington to repeal, or at very least scale back, the "safe harbor" provisions of Internal Revenue Code, Section 530. Under that Section, employers found to have misclassified employees as independent contractors may currently escape or decrease liability for the misclassification where they can show "reasonable basis" for their actions.
Finally, on September 29, Senator Kennedy (D. Mass.) introduced S. 3648, the Employee Misclassification Prevention Act. This legislation would amend the Fair Labor Standards Act to clarify that misclassification of an employee as an independent contractor would be a prohibited act punishable by liquidated damages and civil penalties, in addition to existing remedial measures for minimum wage and overtime violations. The Bill would also facilitate information sharing between the Department of Labor and the IRS, and require state unemployment agencies to investigate and identify employers who are misclassifying workers. While the Bill has only just been referred to committee, its prospects for passage in some form are likely enhanced by the identity of one of its co-sponsors, Senator Barack Obama (D. Ill.).
For more information on this issue and how to avoid misclassification of workers, contact Dick Hooker at 248/567-7403.