Amnesty Program for Independent Contractor Misclassification

by | Sep 23, 2011 | Labor and Employment

One of the hottest topics in Labor & Employment (“L&E”) law is independent contractor (“IC”) misclassification.  This issue receives so much attention because of the cumulative impact of employee wage loss, tax revenue loss, and the impact of back wage and tax liability on an employer. A 2009 report by the United States Government Accountability Office (“GAO”) stated that while the current extent of misclassification is unknown, the most recent study on misclassification (conducted in 1984) estimated that the government was losing close to $1.6 billion (in 1984 dollars) in tax revenue alone (See GAO Report Here).

In consideration of these losses, the United States Department of Labor (“DOL”) and the Internal Revenue Service (“IRS”) have dedicated significant resources to investigating IC misclassification.  Two recent developments are of particular importance to employers.

Interagency Communication:
On September 19, 2011, the DOL issued a press release indicating that it had entered into several Memorandums of Agreement (“MOUs”) with the IRS and agencies in several states to share information relating to misclassification.  The MOUs allow the DOL to “share information and coordinate law enforcement with the IRS and participating states in order to level the playing field for law-abiding employers and ensure that employees receive the protections to which they are entitled under federal and state law”.  Sharing this information could potentially increase liability for employers who have misclassified employees.  DOL investigations involving misclassified employees traditionally resulted in back wage liability for unpaid overtime.  Liability usually stopped there, but these MOUs could trigger IRS or state investigations, resulting in additional liability under federal and state tax law, as well as state wage and hour laws.

IRS & Misclassification:
On September 21, 2011, the IRS announced the creation of the Voluntary Classification Settlement Program (“VCSP”).  The VCSP allows eligible employers to reclassify workers for federal employment tax purposes and significantly limit their possible employment tax liability (See IRS Publication Here).  Employers must submit an application and establish eligibility under the terms of the program.  The result for eligible employers includes:

  1. Liability for only ten percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year;
  2. No liability for interest or penalties; and
  3. Employers will not be subject to investigation with respect to the worker classification for prior years.

While the benefits are apparent, the new program also requires employers to sign an agreement with the IRS to extend the period of limitations an additional three years for the first three years following participation.

There are a couple of unanswered questions.  No indication is given as to whether employer information will be shared with the DOL and state agencies under the new MOUs.  In addition, nothing prevents employees from going to the DOL or state agencies themselves to pursue wage claims resulting from the misclassification.

Action Items:
Moving forward, employers should:

  1. Identify all IC relationships;
  2. Carefully review IC relationships for compliance with DOL, IRS, and state standards;
  3. Assess possible misclassification liability; and
  4. Carefully consider whether the VCSP is appropriate for your business.

Please do not hesitate to contact us if you have any questions or concerns regarding these issues.

More about Burke Costanza & Carberry LLP

More about Burke Costanza & Carberry LLP

Burke Costanza & Carberry LLP seeks to provide clients with the independent professional judgment, commitment and vision consistent with its leadership position among Northwest Indiana lawyers. The firm takes great pride in its heritage. Formed on January 1, 1988 through the merger of two of Northwest Indiana’s oldest and most distinguished law firms, the firm builds on a tradition of experience and excellence. These roots in the Northwest Indiana community provide the firm with a source of strength and an opportunity for future growth.