DOL and IRS Target Independent Contractors
The Department of Labor (DOL) recently released its strategic plan for fiscal years 2011 through 2016. The document details the DOL’s plan to work in concert with the IRS to achieve its strategic goal to “ensure fair compensation” through “enforcement activities, litigation strategies and penalty assessments”. The primary focus of the strategic plan is to focus “enforcement and outreach efforts” largely related to “misclassifications”.
The DOL states in its plan that it believes the “problem” of employers misclassifying employees as independent contractors impacts between 10% and 30% of all employers. The DOL believes this practice results in the loss of billions of dollars to the IRS, Social Security, Medicare and state and federal unemployment insurance trust funds.
The DOL has identified what it calls “high-risk industries” which include: janitorial; home healthcare; childcare; transportation and warehousing; meat and poultry processing; other professional and personnel service industries and, construction and hospitality.
Combine this plan with increased enforcement activity by the IRS, estimated by some observers to be thousands of new IRS agents that will be hired under the healthcare and financial reform legislation, and it becomes difficult to imagine that audits and enforcement will not increase.
Consolidation of Contractor Testing
On the state level, there is somewhat positive news for employers. In Murray v. Principal Financial Group
(9th Cir. July 27, 2010), the Ninth Circuit Court of Appeals acknowledged that the various tests developed to determine whether an individual is an “employee”—the “common law agency test,” the “economic realities test,” and the “common law hybrid test”—are, in fact, the same test. Despite this consolidation, there is still substantial grey area in determining the factors which decide “economic realities”. Factors such as the amount of investment that the contractor has in the tools and equipment related to the work; the financial viability of the contractor’s enterprise; and the degree to which the contractor’s activities are integral to the engaging enterprise are critical and must be documented in order to be supportable in an audit.
If your organization operates in one of the targeted industries mentioned above and/or has multiple contractors even if not identified, the odds of being audited in the next three to five years are significantly higher then they have been in the past ten years. A pre-audit checklist and improving the way contractors are identified, tracked and handled are critical factors in supporting the defense of any audit.
If you are interested in learning more about how to distinguish contractors from employees and practical tips that can be implemented in your organization, we highly recommend you attend our upcoming webinar entitled “Independent Contractors – The Stakes Are Getting Higher” to be delivered on December 9th, 2010 at 10am. Please click on the link “Independent Contractors – The Stakes Are Getting Higher”
if you are interested in registering.