Worker Classification Update

Labor & Employment Law, Taxation
July 26, 2017

On July 20, 2017, the Internal Revenue Service (“IRS”) issued a reminder for small businesses on the importance of correctly classifying workers as employees or independent contractors. Employers failing to do this correctly may face penalties, including trust fund penalties, from the IRS, which can be assessed not only against the employer but also against officers and directors. Classification is important because an employer must withhold income taxes and pay Social Security, Medicare taxes, and unemployment tax on wages paid to workers who are employees, but independent contractors are instead subject to self-employment tax.

Employers must look at the facts in each situation. The IRS has reminded small businesses to focus on three categories to properly classify workers: (1) behavioral control, (2) financial control, and (3) the relationship of the parties. A worker is properly classified as an employee if the employer exercises significant behavioral and financial control over the worker such as controlling the manner of work by giving the worker instructions or training and providing the worker with the tools necessary to complete the work. Also, if the employer and the worker have a permanent working relationship and the employer provides the worker with benefits such as a pension plan or vacation pay, the worker properly would be classified as an employee. On the other hand, a worker should be treated as an independent contractor if the worker has autonomy on deciding the manner of work and amount of hours to work, works for multiple employers, or does not retain a permanent relationship with the employer. These factors all reflect a 20-factor test established by the IRS in Revenue Ruling 87-41.2

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Labor Commissioner’s Office Files $6.3 Million Misclassification and Wage Theft Lawsuit against Glendale Construction Company (CA)

PR Newswire

Aug. 14, 2017, 01:55 PM

LOS ANGELES, Aug. 14, 2017 /PRNewswire-USNewswire/ — The Labor Commissioner’s Office has filed a lawsuit against Calcrete Construction, Inc. seeking $6,300,338 for multiple wage theft violations affecting a group of 249 construction workers and the willful misclassification of 175 workers as independent contractors.

An investigation launched in October 2016 uncovered the Glendale-based company’s failure to pay the workers for overtime hours, allocate pay for sick leave and provide proper wage statements. The lawsuit, filed in Los Angeles Superior Court, also seeks civil damages and penalties.

Beginning in August 2016, Calcrete forced its workers under threat of termination to sign contracts stating they were independent contractors. The company then used staffing agencies Dominion Staffing and Southeast Personnel Leasing to pay the workers.

“It is illegal for employers to use subcontractors to distance themselves from the obligation to pay workers, and we will use every tool to dissuade employers from this scheme,” said Labor Commissioner Julie A. Su. “This lawsuit aims to recover the money these misclassified workers should have been paid after years of wage theft.”

Calcrete employees typically worked 10-12 hours Monday through Friday and eight hours on Saturday. They were paid only their regular hourly rate and not for the 18-28 hours of overtime they regularly worked. This underpayment occurred for a nearly two- year period from 2014-16, the lawsuit specifies.

The lawsuit seeks:
  • Wages and damages of approximately $2,596,438 payable to the workers:
    • $352,000 in overtime wages
    • $1,244,438 in waiting time penalties
    • Over $1,000,000 (specific amount to be determined at trial) for unpaid sick leave and liquated damages
  • Penalties of approximately $3,703,900 payable to the state:
    • $2,625,000 in statuary penalties for willful misclassification
    • $78,900 in civil penalties.
    • Over $1,000,000 (specific amount to be determined at trial) for failure to provide proper wage statements

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Are Georgia firms cheating 1,000s of workers out of benefits, health care? (GA)

By Jon Greenberg on Thursday, August 10th, 2017 at 2:51 p.m.

With health care policy in limbo in Washington, the politicians who would like to be Georgia’s next governor are staking out their own policy outlines. Democratic State Rep. Stacey Evans favors expanding Medicaid, but said the state could take other action as well.

“There are thousands of Georgia workers that are misclassified as independent contractors, so that their employers can wrongfully deny them the benefits that they deserve, including health care,” Evans said Aug. 5. “By expanding Medicaid and classifying workers appropriately, insurance will be available to hundreds of thousands more Georgians.”

We decided to check Evans’ number of misclassified workers, and found she’s on safe ground.

Defining misclassification

Some businesses avoid treating workers as employees by calling them an independent contractor. The person might work only for that one business, use equipment the business provides and do exactly what the business tells him or her to do, and yet be labeled as if the person was in business for themselves.

The advantage for companies is they avoid paying a number of employment taxes, including Medicare, Social Security and unemployment insurance. If they offer health insurance, they would sidestep that too.

As Georgia’s Department of Labor put it, “independent contractors are not independent just because that is what their employer calls them, because that is what they call themselves, or because they sign an ‘independent contractor agreement.’ Independent contractor status depends on the underlying nature of the work relationship.”

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Total netted from state’s misclassification fight exceeds $1.1 million

By: Dan Shaw,
March 15, 2017 4:54 pm

State officials’ efforts to crack down on companies that misclassify direct employees as independent contractors has generated more than $1 million for the state’s unemployment-benefits system over the past few years.

The state began stepping up its enforcement of misclassification laws several years ago. Since then, those efforts have recovered nearly $1.13 million worth of in unpaid unemployment-insurance taxes, penalties and interest, according to a report on the state’s unemployment fund released by the Wisconsin Department of Workforce Development on Wednesday.

Worker misclassification is believed to be particularly rampant in the construction industry, where frequent seasonal layoffs can blur the line between a permanent employee and someone hired for a particular job. Industry officials say deliberate misclassification not only deprives the state of unemployment taxes and other resources; it also gives dishonest companies an advantage by enabling them to avoid the sort of costs that their more scrupulous rivals often end up rolling into bid prices.

The state reported Wednesday that auditors found 8,613 misclassified workers at Wisconsin companies last year. The same year saw tipsters use a state-run website to report 59 instances of suspected misclassification.

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Veterans Urge Walker, GOP To Abandon Prevailing Wage Repeal

Wisconsin American Legion Argues Repeal Would Cost Veterans Jobs

Wednesday, February 22, 2017, 1:45pm
By Laurel White

Veterans are calling on Gov. Scott Walker and GOP lawmakers to abandon their proposals to repeal prevailing wage laws in Wisconsin.

Wisconsin American Legion representatives said Wednesday veteran jobs could be lost if state lawmakers move ahead with repealing the prevailing wage. The group says a large number of veterans work in construction after returning from service.

During the last legislative session, lawmakers removed prevailing wage, which sets minimum salaries for workers, on local construction projects. Now they want to end the prevailing wage for state projects.

“Why is it that always the budget is balanced on the backs of veterans,” said Daniel Seehafer, department commander with the Wisconsin American Legion.

Seehafer and his colleagues cited a 2016 Midwest Economic Policy Institute study that contends 2,000 veteran jobs would be lost if the wage repeal becomes law.

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Happy Holidays From The DOL: User-Friendly Webpage On Independent Contractors Misclassification Arrives

Monday, December 19, 2016
Greg Guidry

On December 19, the United States Department of Labor (DOL) issued what it describes as a “user-friendly webpage where workers, employers, and government agencies can find information and resources” about misclassification of workers as independent contractors.

In the announcement about its new educational and resource tool, the DOL states that the misclassification of employees as independent contractors is a “huge problem for workers, employers who play by the rules and our economy.” It also quotes two alleged victims of misclassification, a taxi driver who said he was underpaid and subjected to terrible working conditions akin to “modern day slavery,” and a masonry contractor who said that misclassification “makes for an unfair playing field” that “has to stop.”

In the cover page, the DOL states that it supports the use of legitimate independent contractors, but when employers deliberately misclassify employees as independent contractors in an attempt to cut costs, everyone loses. The DOL then states that “this new resource offers information about how misclassification affects pay, unemployment insurance, safety and health protections, retirement and health benefits, and taxes. It then pleads to the user: “Help us address this problem by learning more.”

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(USDOL Misclassification Resource Tool)

Pennsylvania Labor & Industry Kicks Off Misclassified Workers Public Awareness Campaign

Pennsylvania Department of Labor & Industry
Oct 19, 2016, 14:51 ET

HARRISBURG, Pa., Oct. 19, 2016 /PRNewswire-USNewswire/ — Pennsylvania Department of Labor & Industry Secretary Kathy Manderino today kicked off a statewide public awareness campaign about worker misclassification. The campaign was funded by a$473,000 grant from the U.S. Department of Labor.

“Worker misclassification is a nationwide problem that has a negative impact on Pennsylvania’s economy and unemployment compensation fund,” Sec. Manderino said. “It creates an uneven playing field for employers who properly classify their workers.”

Worker misclassification occurs when employers treat certain employees as independent contractors when they should not be classified as such. This may be done to reduce payroll and other costs.

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WHD News Brief: 08/31/2016
Release Number: 16-1411-NAT

Participants: U.S. Department of Labor’s Wage and Hour Division
North Carolina Industrial Commission

Partnership description: The U.S. Department of Labor’s Wage and Hour Division and the North Carolina Industrial Commission signed a three-year Memorandum of Understanding intended to protect employees’ rights by preventing their misclassification as independent contractors or other non-employee statuses. The two agencies will provide clear, accurate and easy-to-access outreach to employers, employees and other stakeholders; share resources; and enhance enforcement by conducting coordinated investigations and sharing information consistent with applicable law.

Background: The division is working with the U.S. Internal Revenue Service and 32 other U.S. states to combat employee misclassification and to ensure that workers get the wages, benefits and protections to which they are entitled. Labeling employees as something they are not – such as independent contractors – can deny them basic rights such as minimum wage, overtime and other benefits. Misclassification also improperly lowers tax revenues to federal and state governments, and creates losses for state unemployment insurance and workers’ compensation funds.

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MOU aligns federal departments in effort to ensure full pay, benefits for workers


WHD News Release: 08/22/2016
Release Number: 16-1726-DAL

DENVER – Officials from the U.S. Department of Labor and the U.S. Department of Housing and Urban Development signed a Memorandum of Understanding to help stop the misclassification of workers in Colorado, Montana, North Dakota, South Dakota, Utah and Wyoming.

The first MOU of its kind represents a new effort on the part of the agencies to work together to protect employee rights and level the playing field for responsible employers by reducing the practice of misclassification.

In Fiscal Year 2015, the department’s Wage and Hour Division recovered more than $74 million in back wages for more than 102,000 workers in industries, such as janitorial, food, construction, daycare, hospitality and garment. The division regularly finds low-wage workers are victims of misclassification.

The agreement will help both agencies communicate and cooperate more effectively and efficiently in areas of common interest, including cross training staff and providing employers and employees with information about the law. By doing so, the two agencies seek to protect the wages, safety, and health of America’s workforce by sharing information.

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Electionomics: Fixing The Sham Of Misclassified Workers

07/27/2016 01:07 pm ET
Julie Gutman Dickinson

What if millions of American workers were being denied health insurance, job security and the most basic legal protections, from overtime pay to workers compensation to the right to join a union? What if tens of billions of dollars in taxpayer revenues – money desperately needed to address everything from crumbling roads to education to health care – were never making it to local, state and federal treasuries? What if thousands of companies were violating the law with impunity?

That is exactly what is happening in the U.S. today, thanks to a rampant practice known as worker misclassification – illegally labeling workers as independent contractors when in fact they are employees under the law. In some cases it’s occurring in plain sight, in others it’s more hidden – but regardless of the circumstances, it is taking an enormous toll on the country.

In a 2015 report, EPI described the advantages to employers of misclassifying workers. “Employers who misclassify avoid paying payroll taxes and workers’ compensation insurance, are not responsible for providing health insurance, and are able to bypass requirements of the Fair Labor Standards Act, as well as the 1986 Immigration Reform and Control Act.” If this weren’t enough, the report continues, “misclassified workers are ineligible for unemployment insurance, workers’ compensation, minimum wage, and overtime, and are forced to pay the full FICA tax and purchase their own health insurance.”

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