In its January 18, 2010 issue of “Staffing Week”, The American Staffing Association (ASA) reported on increased efforts at both the federal and state levels to investigate and enforce violations of independent contractor classification rules.  As this is an important topic that may have significant financial consequences for some companies, with ASA’s permission we have re-printed the article below:

Federal and state agencies have been stepping up enforcement efforts against employers across a range of industries for improperly classifying employees as independent contractors. Beginning in February, the U.S. Internal Revenue Service will start auditing 6,000 employers through a national research program. Audits will take place over three years.

The IRS uses a 20-factor test to determine worker status. Employers that misclassify workers as independent contractors when they should have been classified as employees can be held liable for a number of federal and state taxes, including income, unemployment, and workers' compensation. Complicating matters for employers, different governmental agencies employ different classification standards. Moreover, the existence of an independent contractor agreement is not, by itself, determinative of a worker's status. Such contracts may be disregarded if the nature of the relationship appears contrary to the written agreement.

At the federal level, there are two pending bills that attempt to regulate employee misclassification. In the U.S. House of Representatives, Rep. Jim McDermott (D-WA) introduced the Taxpayer Responsibility, Accountability, and Consistency Act of 2009, which would allow individuals classified as independent contractors to petition the IRS for a determination of the propriety of their classification, significantly increases fines, and strikes the safe harbor provision in the Revenue Act of 1978, which protects employers that classify individuals as independent contractors if certain requirements are met.

Sen. John Kerry (D-MA) recently introduced a similar bill in the Senate that would also effectively repeal the safe harbor provision. Further, it includes a provision that would require employers to demonstrate a "reasonable basis" for applying the independent contractor status or confront employment tax responsibilities.

As the majority of states continue to struggle with decreasing revenues, it is likely that enforcement efforts at the state level will also continue to ramp up. Last month, the Illinois Department of Labor announced that, pursuant to the Illinois Employee Classification Act, it had levied a $328,500 fine against a Chicago contractor after discovering that the contractor had misclassified 18 of its employees as independent contractors.

A handful of states, including Colorado, Maryland, Massachusetts, and New Mexico, have recently enacted laws aimed at employee misclassification in the construction industry. It is anticipated that many states will follow suit and seek to enact employee misclassification laws in 2010.

 

Partnering with a contract staffing firm eliminates the significant risks of improperly classifying a worker.  Contractors provided by a staffing firm are employees of that firm.  The staffing firm pays all applicable payroll taxes, unemployment taxes, and workers’ compensation; therefore, you have no potential tax liability resulting from misclassifying a worker.

Triad Engineering Corp has specialized for over 40 years in helping our clients fill their technical staffing needs on a contract, contract-to-direct and direct hire basis.  Triad is locally owned and operated, with a large network of qualified engineering professionals throughout New England.  Please contact us at 781-273-1880 or visit www.triad-eng.com for more information on how we can help you achieve your technical hiring goals.