E. Jason Tremblay

In continuing a trend already underway in the United States regarding the misclassification of employees as independent contractors, California Governor recently approved legislation imposing strict penalties for California employers found willfully to have misclassified workers as independent contractors. The legislation known as the “Job Killer Act” provides for fines of between $5,000 and $25,000 (depending on the severity of the violations) on employers who misclassify workers as independent contractors, mandates certain record keeping and notice requirements, as well as provides joint and several liability for any person who “knowingly advises” an employer to misclassify a worker as an independent contractor. As a result, any company with workers located in California, especially those with workers that are classified as independent contractors, should be extremely careful as to how they classify those workers.

Should you have any questions regarding the Job Killer Act or handling your contingent workforce, please contact your employment law counsel or E. Jason Tremblay of Arnstein & Lehr LLP at (312) 876-6676 or by email at ejtremblay@arnstein.com.

E. Jason Tremblay

On the heels of the U.S. Department of Labor’s announcement that it was going to share independent contractor misclassification information with the Internal Revenue Service (“IRS”), the IRS recently announced the implementation of the “Voluntary Classification Settlement Program” (“VCSP”). The VCSP is intended to encourage employers who have misclassified workers, for a relatively small payment to the IRS, to reclassify those workers as employees for federal employment tax purposes. In effect, this allows employers to avoid all but 10% of the past employment tax liability that the companies would have owed for prior years. The IRS will also not conduct employment tax audits of the companies for prior years with respect to the classification of the workers.

Sound good? Well, in certain circumstances, this may be appropriate. However, employers must carefully consider all potential ramifications before participating in the VCSP. For example, reclassifying workers as employees raises many issues other than federal employment tax issues, including retirement benefit plan issues, state tax classification issues, unemployment and workers’ compensation tax issues and health and welfare benefit plan issues. Companies choosing to participate in the VCSP will also have to begin providing employee benefits, comply with wage and hour laws and comply with all other federal and state employee obligations to the reclassified employees. And, since the VCSP would not provide any amnesty for violations of other laws, such as state or federal overtime laws or state tax law violations, care must be given before deciding to whether to participate in the VCSP.

To be eligible for the VCSP, employers must (1) consistently have treated the workers as non-employees, (2) have filed all required 1099s for the workers for the prior three years, and (3) not currently be under audit by the IRS, Department of Labor or any state agency concerning the classification of workers. Employers accepted into the VCSP must enter into a closing agreement with the IRS whereby they agree to (1) prospectively treat the workers as employees, (2) pay 10% of the federal employment tax liability that may have been due on compensation paid to workers for the most recent year, and (3) allow a six-year statute of limitations on the assessment of IRS employment taxes for the first three calendar years after the employer is enrolled in the IRS Program.

For any questions regarding the VCSP or your company’s classification of workers, you should immediately consult with your experienced employment law attorney or contact E. Jason Tremblay of Arnstein & Lehr LLP at (312) 876-6676 or by email at ejtremblay@arnstein.com.

E. Jason Tremblay

In what appears to be another example of cracking down on the improper use of independent contractors, the U.S. Department of Labor (“DOL”) recently announced it is entering into agreements with the IRS, as well as some state agencies (including Illinois state agencies), to share information regarding employers who have improperly classified employees. The DOL maintains that these arrangements are necessary to share information and coordinate law enforcement with the participants to end the practice of misclassifying employees. However, it is clear that this collaboration has as much to do with enhancing the inflow of tax revenues as it does with protecting employees.

What this practically means for businesses is that if the DOL determines that an independent contractor is misclassified, it can share that determination and evidence with, for example, the Illinois Department of Employment Security or other state agencies, which could very well lead to additional investigations, fines, fees and liability upon the business beyond those by IDOL. In light of this, every company with a business model based, in whole or in part, upon the use of independent contractors should prepare itself for this new enforcement activity and immediately consult with an employment attorney to perform an audit of those workers.

For further information on this recent development, please contact E. Jason Tremblay of Arnstein & Lehr LLP at (312) 876-6676 or by email at ejtremblay@arnstein.com.

Hiring Interns

The current economic situation in this country has led to an increase in the use of unpaid internships by companies, especially unpaid internships for young people who have been hit particularly hard by unemployment.  However, employers need to be extra careful in this regard since the U.S. Department of Labor (“DOL”) recently announced that it is cracking down on what it claims is the excessive and improper use of unpaid interns by companies for free labor.  Specifically, the DOL recently proclaimed that “[i]f you’re a for-profit employer or you want to pursue an internship with a for-profit employer, there aren’t going to be many circumstances where you can have an internship and not be paid and still be in compliance with the law.”

For an unpaid internship to be lawful under the Fair Labor Standards Act (“FLSA”), the intern must be classified as a “trainee” rather than an employee.  The DOL has developed the below six factors to evaluate whether a worker is a trainee or an employee for purposes of the FLSA:

1. The training, even though it includes actual operation of the facilities of the employer, is similar to what would be given in a vocational school or academic educational instruction;
2. The training is for the benefit of the trainees;
3. The trainees do not displace regular employees, but work under their close observation;
4. The employer that provides the training derives no immediate advantage from the activities of the trainees, and on occasion the employer’s operations may actually be impeded;
5. The trainees are not necessarily entitled to a job at the conclusion of the training period; and
6. The employer and the trainees understand that the trainees are not entitled to wages for the time spent in training.

If all the above factors are satisfied, the worker will be deemed a “trainee,” not an employee, and the worker can lawfully be unpaid under the FLSA.  Put another way, unless all the above factors are met, the worker will be classified as an employee entitled to, among other things, minimum wage and overtime.  A misclassification of a worker as a “trainee” could also obligate the company to pay workers’ compensation and unemployment insurance benefits, as well as subject the company to federal and state discrimination laws, tax liability, fines and significant legal bills.

In light of the foregoing, employers must carefully tailor any existing or future unpaid internship programs to make sure that they comply with the above factors in order to avoid liability.  Should you have any questions about this issue, please contact E. Jason Tremblay at Arnstein & Lehr LLP.

Employment Contact being signed by the employee

The legal landscape regarding the use of independent contractors has dramatically changed over the past several years.  For decades, employers’ use of independent contractors was not only rarely challenged, but it was also a way they could save significantly on labor and other costs associated with hiring employees.  In this tough economy, employers may be tempted to use the services of independent contractors instead of employees in order to reduce their bottom-line costs.  However, now more than ever, employers need to be extra careful in this area since both state and federal agencies are cracking down on what they believe is the widespread and improper use of independent contractors.

By way of example, the U.S. Department of Labor (DOL) has recently made the misclassification of workers one of its top priorities.  President Obama’s proposed 2011 budget for the DOL includes an additional $25 Million for what he characterizes as the “Misclassification Initiative.”  In this regard, it is expected that the DOL will hire an additional 100 enforcement personnel to investigate claims of misclassifying workers as independent contractors.

The Internal Revenue Service is also taking the misclassification of employees seriously.  The U.S. Government Accountability Office (GAO) recently concluded that employee misclassification is a “significant problem” because it reduces tax revenues flowing to the federal government.  In fact, the GAO estimates that over $7 Billion in payroll taxes will be lost over the next ten years.  Needless to say, the IRS does not take this loss in revenue lightly and has notified the public that, commencing in 2010, it will increase its employer tax audits with the specific purpose of determining whether employers are misclassifying workers as independent contractors.

States around the country have also seen this as a significant issue.  Illinois, New York, Maryland, Colorado and Delaware, to name a few, have either increased penalties for improperly classifying workers as independent contractors or have passed laws specifically designed to penalize employers for misclassifying workers.  There has even been legislation pending in Congress, which was sponsored a former Illinois Senator named Barack Obama, called the Independent Contractors Proper Classification Act, that would restrict an employer’s ability to classify a worker as an independent contractor.  Specifically, it would grant workers the right to petition the Secretary of Treasury for a determination of their status as employees or independent contractors and obligate employers to provide notice to workers of their right to seek a determination.  Simply put, the issue of misclassifying workers is not going away anytime soon.

Unfortunately for employers, there is no single test to ascertain whether a worker should be classified as an employee or an independent contractor.  And, to make matters worse, different state and federal agencies utilize different tests and standards in this regard.  However, common scenarios that raise red flags to governmental agencies are:

• Individuals classified as independent contractors who perform the same kind of work or duties that employees also perform for the business;
• Individuals classified as independent contractors who perform work that  is essential to the services or work of the business;
• Arrangement where the independent contractor either dedicates all his or her time to the business or is restricted from performing services for other businesses;
• Individuals designated as independent contractors who perform work for which other businesses in the same industry use employees.

In light of the foregoing, all employers must properly evaluate whether any current workers are appropriately classified as independent contractors and, if necessary, change the classification to comply with current federal and state law.  For a more detailed discussion of the benefits, risks and other issues related to the use of independent contractors, please contact E. Jason Tremblay and/or request a copy of the Employment Law Toolkit that he recently authored.