Independent Contractors Dos and Donts James P. Greene Dykema 2723 - - PowerPoint PPT Presentation

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Independent Contractors Do’s and Don’ts

James P. Greene Dykema 2723 South State Street Ann Arbor, Michigan 48104 (734) 214-7667 jgreene@dykema.com

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Advantages to Employers

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Who Cares?

 IRS

• More difficult to collect income taxes

from independent contractors

 HHS

• More difficult to collect payroll taxes

from independent contractors

 Department of Labor

• Potential abuse of minimum wage

and overtime laws

• Potential abuse of anti-discrimination

laws

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Who Cares?

 State of Michigan

• More difficult to collect income taxes

from independent contractors

 Michigan Unemployment Agency

• Employers are not contributing to the

UI fund

 Michigan Workers Compensation

Agency

• Workers are not protected
• Employers are not contributing to the

WC fund

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How Big of a Problem?

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What’s Being Done?

 Department of Labor

• 2011 FY Budget included $25 million

to combat misclassification of employees as independent contractors, including: –$12M and 90 FTE to WHD for targeted investigations –$11.25M and 2 FTE for grants to states to focus on misclassification –$1.6M and 10 FTE to Solicitor of Labor to pursue misclassification litigation

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What’s Being Done?

 Department of Labor

• 2012 FY Budget request of $50

million to pursue misclassification

• 2013 FY Budget of $14 million for

same

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Michigan Task Force

In February 2008, the State of Michigan created an “Interagency Task Force on Employee Misclassifications.” The task force was established to discover classification violations by working cooperatively with local, state and federal law enforcement agencies, including the IRS.

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Risks Associated with Employee Misclassification

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Risks (continued)

 Insurance Premiums

• Back payment of premiums (if insurer

permits)

 Penalties

• Government fines
• Payment of employment taxes

– 100% of FICA contribution – Employer may not collect employee amount from misclassified worker

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Who is an independent contractor?

 Each governmental unit and/or agency

uses its own analysis to determine if a worker is an “independent contractor”

 No unit/agency has a precise definition –

the totality of the circumstances must be analyzed.

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Michigan Economic Reality Test

The Michigan Unemployment Agency, based upon court decisions, uses the “economic reality test” to determine if a worker is an employee or an independent contractor. No one consideration used in the test answers the question; they must all be considered together.

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Economic Reality Test

 Whether the employer will incur liability if

the relationship terminates at will

 Whether the work performed is an

integral part of the employer’s business

 Whether the employee depends upon

the wages for living expenses

 Whether the employee furnishes

equipment and materials

 Whether the employee holds himself out

to the public as able to perform the same tasks

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Economic Reality Test

 Whether the work involved is

customarily performed by an independent contractor

 The factors of control, payment of

wages, maintenance of discipline, and the right to hire and fire employees

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IRS Test

The IRS looks at the degree of control the employer exerts over the worker and the degree of independence exhibited by the worker. The IRS considers facts that provide evidence in the following three categories:

 Behavioral Control  Financial Control  Type of Relationship

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Behavioral Control

 Control over when and where the work

will be done

 Whether or not the employer provides

instruction on how the work will be done

 Whether the worker uses the employer’s

• r his/her own tools and equipment

 Whether or not the employer provides

training to the worker

 How the worker is evaluated (details or

end result)

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Financial Control

 Extent of unreimbursed business

expenses

 Extent of worker’s investment in

equipment and facilities

 Extent to which the worker’s services

are made available to the relevant market

 Extent to which the worker can realize a

profit or loss

 Method of payment

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Type of Relationship

 Whether or not the employer provides

the worker with employee-type benefits

• Insurance
• Pension plan
• Vacation, holiday, or sick pay

 Whether or not the worker is provided a

copy of the employee handbook

 Whether or not the worker is engaged

with the expectation that the relationship will continue indefinitely

 The extent to which the worker’s

services are a key aspect of the employer’s regular business

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US Supreme Court

In resolving disputes under the Fair Labor Standards Act, the US Supreme Court has said that no single factor is determinative, but depends upon the whole activity. The factors the Court has considered significant include:

The extent to which the worker’s services

are an integral part of the employer’s business

The permanency of the relationship

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US Supreme Court cont.

The amount of the worker’s investment in

facilities and equipment

The nature and degree of control by the

principal

The worker’s opportunities for profit and

loss

The level of skill require in performing the

job and the amount of initiative, judgment,

• r foresight in open market competition

with others required for the success of the claimed independent enterprise

Painter Bob

A Straightforward Example

 Painter Bob

• Bob advertises in the local

newspaper to get jobs

• He maintains his own brushes,

ladders, and drop cloths, and buys his own paint

• He is paid by the job
• When the paint job is complete, Bob

no longer works for the customer/employer

• Bob is an independent contractor

Painter John

A Straightforward Example – Part 2

 Painter John

• John reports to work at the same

company every day

• The company provides John with the

paint, brushes, ladders and other materials to do the job

• The company sets John’s working

hours

• John works for the company full time
• John is an employee of the

company

Painter Paul

A Little Murky

 Painter Paul

• Paul reports to work at the same

company 3 or 4 days a week. He works only 3-4 hours each evening.

• Paul advertises in the local

newspaper to get additional day jobs.

• The company provides Paul with the

paint, brushes, ladders and other materials to do the job.

• The company pays Paul by the hour

and Paul has some discretion on the days he works.

• Paul has worked for the company in

this capacity for several years.

Treated as an Employee

 Did you give the worker an employee

handbook?

 Did you give the worker some employee

benefits? (paid sick days, access to EAP or reduced membership to gym?)

 Did you evaluate the worker using the

same forms as are used for employees? How you treat a worker is part of the total picture in determining his/her classification as an employee or independent contractor.

Employment Agencies Solve the Problem,…Right?

 Employment agencies hire, fire and pay

the workers.

 Employment agencies are responsible

for withholding income and payroll taxes, paying the employer’s portion of FICA, and possibly providing fringe benefits to the workers.

 The contracting company pays the

agency with a vendor check.

 So what could go wrong?

“Joint Employers”

 A

contracting company may be considered a “joint employer” depending upon the amount of control it exercises

• ver the worker during the term of the

assignment.

 A determination is made by looking at

the entire relationship.

“Joint Employers”

Factors to consider in determining if there is a joint employment relationship include:

 The nature and degree of control over

the worker

 The degree of supervision exercised

• ver the work

 The furnishing of work space and/or

equipment

 The power each has to determine the

pay rates or method of payment

 The right each has to hire, fire or modify

working conditions

Liability of a Joint Employer

 Anti-discrimination

• May be liable for discriminatory

treatment or hostile work environment

 FMLA

• Leased employees who work for a

full workweek are counted toward the 50 minimum for FMLA coverage

• Agency responsible for notices
• Contracting employer may be

responsible for accepting a leased worker returning from FMLA leave

Liability of a Joint Employer

 FLSA

• Both employers are liable for

minimum wage and overtime requirements

 NLRA

• Temporary employees from an

agency may be included in a bargaining unit if they share a “community of interests”

• Both employers may be held liable in

an unfair labor practice

Liability of a Joint Employer

 OSHA

• Leasing employer will likely be liable

for work-related injuries

Best Practices When Leasing Employees

 Seek an indemnity agreement in the

contract with the staffing agency so that the agency retains liability for employment-related claims and agrees to indemnify the client for any losses they may incur attributable to the actions

• f the agency

 Contract should include a provision

making the agency responsible for payment of all employment taxes

Best Practices When Leasing Employees

 Employers

should verify that the employees are covered under the agency’s workers’ compensation policy.

 Employers should accommodate the

needs of a worker with a disability, unless it would be an undue hardship.

 Employers should ensure that leased

workers are not subjected to discriminatory treatment or harassment.

 Employers should review their policies

and benefit plans to ensure that leased employees are not eligible for company benefits.

IRS Voluntary Classification Settlement Program

IRS Voluntary Classification Settlement Program

 Eligibility

• Are currently treating the workers as

non-employees

• Have satisfied Form 1099

requirements for the workers for the past 3 years

• Have no current dispute with the IRS
• r the DOL regarding the workers’

status

• Have not been previously audited by

the IRS or if so, have complied with the results of the previous audit.

IRS Voluntary Classification Settlement Program

 Requirements

• Employer agrees to prospectively

treat the workers as employees in the future

• Employer agrees to extend the

period of limitations on assessment

• f employment taxes for 3 years

beginning after the date of the agreement

IRS Voluntary Classification Settlement Program

 Benefits

• Employer will pay 10% of

employment tax liability that may have been due on compensation paid to workers for the most recent tax year

• No interest or penalties on the

liability

DO

 Review all relationships with

independent contractors and their duties under the guidelines for all agencies (IRS, DOL, State of Michigan)

 Review all contracts/agreements with

leasing agencies

 Review all contracts/employment

agreements with individual independent contractors

DON’T

 Treat independent contractors as

employees

 Automatically refuse to address ADA

accommodation requests by independent contractors

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Thank You