IRS And State Announce Crackdown On Employers Who Misclassify Workers

In today’s difficult economy, many businesses use independent contractors to perform work instead of hiring employees as a way to save money on taxes, workers compensation premiums and unemployment compensation. Contractors are easier to hire and fire, usually are not paid overtime, and don’t receive employee benefits. However, they can perform many of the same tasks as regular employees. Experts say that a growing number of companies are misclassifying workers, costing government millions of dollars in unpaid taxes. The Labor Department estimates that 30 percent of companies misclassify employees. Truck drivers, constructions workers, home health aides, and high-tech engineers tend to be the most often misclassified workers. In February, 2010, Ohio Attorney General Richard Cordray announced “vigorous enforcement efforts” to identify companies that have misclassified workers. “This is inexcusable in any economic environment, but absolutely unforgivable today,” he said in a written statement. “It is time to level the playing field for those businesses that play by the rules.” The Ohio Department of Job and Family Services, Ohio Department of Taxation, and Ohio Bureau of Worker’s Compensation have signed an agreement to share confidential information that might help them identify employers who misclassify workers, according to an article that appeared in The Columbus Dispatch. (“State Targets Wage Cheaters.” James Nash, The Columbus Dispatch, Feb. 19, 2010).

The federal government is also starting to aggressively pursue companies that try to pass off regular employees as independent contractors. The IRS has begun auditing 6,000 companies according to The New York Times (“U.S. Cracks Down on Contractors as a Tax Dodge.” The New York Times, Feb. 17, 2010).

However, the law is unclear as to who is an independent contractor and who is an employee. It is important for employers to understand the rules that govern classification. The IRS rules are generally known as the IRS “20 Factor Test.” Some of the “20 Factors” that are considered in making this determination are:

  • Training – If the Company provides training to the worker, he or she is more likely to be an employee.
  • Set Hours of Work – If the Company establishes set hours of work, the person is more likely to be an employee.
  • Full-time required. An independent contractor is free to work on other jobs, generally, whereas an employee is not.
  • Payment of businesses and/or travel expenses by the Company tends to indicate that the worker is an employee.
  • Furnishing of Tools and Materials by the Company also tends to shout that the relationship is that of employer and employee.

The common theme that can be found in many of the 20 Factors is control. An employer has a much greater degree of control over how, when and where an employee performs his work than it would with a contractor. Companies may wish to review their classification of workers with legal counsel to make sure they are in compliance with the law.

For more information, please contact Melissa Izenson.

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