Sunday, May 19, 2013

The IRS is the federal entity we usually associate with misclassification errors related to independent contractors. The penalties for misclassification include uncollected employment taxes and federal income taxes. But one federal entity that is not regularly associated with independent contractors is the Wage and Hour Division of the Department of Labor. Abbreviated WHD, the Wage and Hour Division is responsible for the enforcement of the Fair Labor Standards Act or FLSA.

The FLSA contains the regulations related to the qualifications for salaried employees and guidance on hourly employees. The FLSA sets the guidelines for overtime. The FLSA is voluminous and applies to myriads of situations.

Recently the WHD assessed penalties in excess of 1 million dollars to a directory assistance provider. The penalties were related to the misclassification of independent contractors. According the report released by the WHD the company provided directory assistance. The individuals were employed to answer the incoming text messages. The company paid them as independent contractors. The contractors pay was based on a piece rate corresponding on the number of texts they answered without regard to the number of hours they worked.

The WHD determined the workers were not independent contractors and had to be treated as employees. In making the reclassification the WHD determined that the piece rate the contractors had been paid did not result in minimum wage based on the number of hours they had worked. This violation resulted in back pay to over 14,568 employees. In addition to the minimum wage violation, now the company will be subject to an IRS audit regarding the contactors and adjustments related to the payments of employment and federal income taxes.

The DOL uses what is referred to as the ABC test to determine if someone qualifies as an independent contractor.

A- Absence of Control (Behavioral Control for IRS)

B- Business is unusual and/or away (Financial Control for IRS)

C- Customarily Doing Business as an Independent Contractor (Relationship of Parties for IRS)

The indications are the WHD and IRS will continue to aggressively target companies for misclassification of independent contractors. The implementation of the major provisions of the Patient Protection and Affordable Care Act may tempt some employers to move workers from employees to independent contractors. The IRS has stated they will be reviewing companies that demonstrate a significant decrease in employees with a corresponding increase in independent contractors.

If you have questions regarding the classification of employees or contractors please contact Gary@IlluminareGroupInc.com or visit our web site at www.IlluminareGroupInc.com for additional information on the classification of employees, the affordable care act and payroll issues.

IRS CIRCULAR 230 -- DISCLOSURE NOTICE: IRS Circular 230 regulates written communicationsabout federal tax matters between tax advisors and their clients. To the extent the preceding correspondence and/or any attachment is a written tax advice communication, it is not a full "covered opinion". Accordingly, this advice is not intended and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS regarding the transaction or matters discussed herein.