Tag Archives: IRS

The Steep Consequences of Misclassification

Two recent developments are a good reminder that companies who have independent contractors are under increased scrutiny and face a high bar in establishing that independent contractors are properly typingclassified as such — and not employees.

On July 15th, the Department of Labor issued a guidance saying that most workers qualify as employees under the Fair Labor Standards Act (FLSA) regardless of what the worker and the company may have agreed to. The guidance doesn’t announce a new test for independent contractor status. Instead, it starts with the “economic realities” test for independent contrator status that courts regularly use and a reads it together with a broad view of the FLSA’s definition of employ to reach a conclusion that most independent contractors are misclassified and should, instead, be treated as employees.

The DOL’s guidance was close on the heels of a decision by the Seventh Circuit Court of Appeals, which reversed the lower court and ruled that FedEx delivery drivers are employees under Kansas state law, not independent contractors.  In making its decision, the 7th Circuit certified the question of whether the drivers were employees under the Kansas Wage Payment Act to the Kansas Supreme Court.  The Kansas Supreme Court, applying a 20-factor test, found that the drivers were employees because FedEx, among other things, assigns drivers their routes; requires them to check in with FedEx managers at the start of their day; regulates their appearance; and decides whether to hire a driver after the driver submits resumes and references like any other employee.

So what are the consequences of misclassification?  Companies that misclassify employees as independent contractors face penalties for failing to pay employment taxes, for failing to withhold taxes from pay, for failing to comply with wage and hour requirements (such as overtime), for failing to contribute to unemployment compensation, and for failing to comply with other employment-related laws.  In addition, the Affordable Care Act opens companies that misclassify workers to significant penalties — both based on failure to offer coverage to the required portion of the workforce and where a misclassified worker obtains coverage on an exchange.

In light of these developments, we strongly recommend that any company that has independent contractors work with counsel to determine if these workers are properly classified.  A thorough review now could save you lots of money, time, and aggravation later.

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Temporary Waiver of ACA Penalties for Small Employers’ Individual Insurance Premium Reimbursement Plans

affordable-care-act-generic-graphic-hearstLast week, the IRS announced the waiver (for 2014 and the first half of 2015) of the penalty for “small” employers that reimburse employees for individual health insurance premiums. To the IRS, “small employer” means an employer that normally employs fewer than the equivalent of 50 full-time (30 hours/week) employees. You can read the entire notice here.

We have previously posted about the IRS and DOL position that employer reimbursement of employees’ individual health insurance premiums—either inside or outside of a public exchange—are “group health plans” that violate the Affordable Care Act’s insurance market reforms (links to our related posts follow this one). This latest IRS notice confirms their previously announced position, and clarifies that even a reimbursement program that treats the reimbursement as taxable gross income to employees (“after-tax”) violates the ACA if the employer makes the payment only as reimbursement for health care and not to employees who do not have those expenses.

We expect the ACA rules and deadlines to continue to evolve, so we are advising our clients to stay tuned and check in with legal counsel if in doubt over compliance requirements and non-compliance penalties.  We will continue to keep you posted as news develops.