In a move that will affect most American corporations, the Department of Labor plans to require companies to prepare and adopt compliance plans aimed at ensuring they do not violate wage, job safety and equal employment laws.
The effort, aimed in part at reducing the incidence of employers not paying overtime and improperly classifying workers as independent contractors, will require them to document many of their decisions and share that information with their workers and the government.
In general, employers increasingly are classifying primarily low-wage workers as independent contractors instead of employees in the construction industry. By doing so, employers can issue these workers 1099 forms instead of W-2 forms to report their income. Employer misclassification of workers as independent contractors instead of employees negatively impacts employers, employees, and taxpayers, according to an AFL-CIO attorney.
"So what's the big deal?" you may ask. "The big deal is by doing this; they immediately gain a 30% advantage over an employer who complies with the law," says AFL-CIO Associate General Counsel William Lurye.
That percentage is calculated from the savings the employer obtains from not withholding federal and state income taxes, social security taxes, federal unemployment taxes, state workers' compensation, and state unemployment insurance premiums from employee pay.
Lurye says items not withheld by the employer "become the individual's responsibilities" when he or she has to file their federal and/or state income tax returns."
Additionally, workers themselves are adversely impacted by misclassification because they do not qualify for fringe benefits they would normally be entitled to as employees. For example, for workers classified as independent contractors, no contributions are made on the worker's behalf to any employer-based pension, health, or welfare plan and independent contractors are not entitled to unemployment or workers' compensation benefits.
Federal and state governments lose millions of dollars in income tax revenue because of misclassification. This lost tax revenue not only negatively impacts governments, but taxpayers as well. Individual tax payers pay the taxes that make up for those taxes that weren't properly withheld and paid.
Currently pending in Congress, is the Employee Misclassification Prevention Act (S. 3254/H.R. 5107), which would amend the Fair Labor Standards Act (FLSA) to require employers to keep records of who is being classified as an independent contractor, evidence of how an employer determined independent contractor status, rates of pay, and hours worked. Additionally, the measure would require workers to be notified that they are being classified as independent contractors and to be given the right to appeal that classification to the Labor Department's Wage and Hour Division or the Internal Revenue Service (IRS). The bill would require damages for failing to keep proper records.
Also pending in Congress is legislation (H.R. 3408/ S. 2882) that would amend a 1978 safe harbor provision in Section 530 of the Internal Revenue Code that protects employers that misclassify workers from IRS penalties if the employer can show "in essence that they relied on good faith on legal counsel opinions, CPA opinions, or [that] it was industry practice to misclassify workers", according to Lurye.
"That temporary provision is still in effect today, a full 32 years later," according to Lurye. The legislation intends to "re-enact a new safe harbor which would be much more limited."
"We think that given the growth of this problem, both the amendments to the FLSA and the safe harbor provision of Section 530, are long overdue," says Lurye.
Read the full description of these bills at thomas.gov.
The IRS has announced plans to conduct 6,000 random audits over the next three years to identify employer misclassification. Deputy Labor Secretary Seth Harris says his department wants to foster a culture of compliance among employers to replace what he describes as a "catch me if you can" system in which too many companies violate employment laws.
Source: BNA Construction Labor Report