Secure Talent and Advantage Present:
The Costs of Worker Misclassification: How New York is Leading the Charge for National Reform
Worker misclassification Webinar, The Costs of Worker Misclassification: How New York is Leading the Charge for National Reform, held on Feb. 13, 2008, was an overwhelming success. Numerous human resources executives from Fortune 500 companies attended to hear Cornell University’s Fred B. Kotler, J.D., expand upon the results of the landmark 2007 study that served as a basis for Gov. Eliot Spitzer’s Executive Order for New York’s Joint Enforcement Task Force on Employee Misclassification. In addition, attendees of the Webinar learned about up-to-date legislation and how to avoid the consequences of employee misclassification.
Contact us to receive a copy of the Worker Misclassification Webinar
Recent legislation and landmark class action lawsuits are changing the way businesses and independent contractors view worker misclassification. While states such as New York have been proactive in clarifying the laws, many professionals are still unclear on how the issues surrounding worker misclassification can affect them.
18 questions regarding worker misclassification
1. Will New York’s worker classification efforts result in lower comp rates for employers who currently classify workers properly? If so, what is the estimated impact?
Unfortunately, it may take some time before workers comp rates are lowered. NY would have to make up for money lost due to misclassification before any rates would be lowered. The competitive disadvantage lies with companies that are properly classifying workers.
2. If you determine that you have misclassified ICs and decide to "convert" to employee status, is it possible to prevent or minimize the costs or liability from previous period of misclassification?
To minimize your risk, you may want to engage an expert to ensure that the individuals are in fact misclassified before taking action to re-classify them as employees. An individual receiving a W2 and 1099 from the same company can be a trigger for an audit. Keep in mind that while you may believe an individual is correctly classified as an independent contractor, you will have to prove the classification in an audit. Additionally, initiating a 1099 compliance program to ensure that all future workers will be properly classified will go far in mitigating your risk.
3. What if a worker set their hours but not their wage?
A true independent contractor has a significant investment in their business and performs services free of behavioral or financial control. Independent contractors set their fees and determine the manner and means by which they deliver their services.
4. Is this presentation meant to address classification in terms of eligibility for overtime? And if so can you speak to problems, litigation in this area for things such as FLSA violations? Have you seen much litigation involving colleges as employers?
No. Although a reclassification from 1099 to W2 status can also result in a claim for non-exempt status and payment of overtime as well as benefits, etc. The guidelines for classification apply to all employers and as such colleges are not exempt.
5. What is the appropriate way for employers to determine a candidate’s ability to legally work in the United States? From a legal standpoint do 1099 related expenses include all expenses related to with service or strictly the contract rate for the worker?
A company’s process for engaging service providers as well as independent contractors should include amongst other things contract language requiring their employees and/or assistants be paid on W2’s and/or evidence that a sound process is in place for classifying an individual to be paid on a 1099.
6. If an IC carries GL and WC insurance does this meet the compliance standards established in the “controls of work” test? Do all the other tests apply as well?
Individuals paid on a 1099 should provide proof of appropriate insurances and control the manner and means by which they provide their services. However, these things alone will not ensure their 1099 status. The test used in an audit will be determined by the government agency conducting the audit and at a minimum require substantially more evidence to support 1099 classification.
7. What measures can you take to prevent an audit?
Ensure that your process for classifying individuals as independent contractors is sound and as such includes effective communication of the process, relationship of the parties, written instrument excluding access to benefits, etc.
8. What behavior triggers an audit? Which regulatory bodies are most likely to conduct an audit (IRS, EDD, etc.)?
Various state and federal agencies conduct audits either on a proactive and reactive basis or both, e.g., IRS, DOL, EEOC, OSHA, NLRB, etc. There are many triggers that can initiate an audit e.g., claim for unemployment, claim for worker’s compensation, a company with a high 1099 volume, FLSA claims, 1099/W2 issued by the same company for the same worker in the same year, wrongful discharge, EEOC complaint, ADA claim, worker receiving only one 1099 in a year, sharing of data between federal and state agencies, etc.
9. How are employers identified as “misclassifiers?” Is it true that this is usually triggered by complaints from disgruntled ICs that decide they should have been employees?
As referenced in question #8, various agencies conduct proactive and reactive audits, including random audits. Workers disgruntled or not, knowingly and unknowingly can initiate audits as a result of their actions. Government agencies at virtually all levels have been targeting industries believed to have significant instances of misclassification.
10. What is the best source for the correct, current definitions/differences between IC, freelancer and temps?
While the definitions can be confusing and arguably open to interpretation, it is very important to understand how the many federal and state agencies define worker classification and subsequently apply their definition in an audit.
11. Can a social security number be used as a tax ID or do you have to apply for IC status in NYC, NJ & CT?
The use of a tax ID vs. a social security number is another step towards establishing independent status and reducing the risk of an audit.
12. How many companies are there out there like Secure Talent? What sets you apart from your competitors?
The number of firms specializing in 1099 risk mitigation is very limited. This is a relatively new field, perhaps less than 20 years old. The advent of the .com increased the number of independent contractors exponentially and thus interest by government agencies related primarily to tax collection. Secure Talent specializes in risk mitigation associated with employment classification and co-employment. This is an area that we specialize in – it is not an “additional service offering”. Because of the significant risk associated with misclassification and the complexity due to the number of governing agencies, we hire industry experts and invest substantial resource on a daily basis in researching existing, pending and proposed legislation, legal action, etc. We have also gone to great length to enable high touch, consultative service with current technology to minimize the impact of the compliance process on the productivity of our clients and their service providers. We see ourselves as an extension of our client, their culture, their brand, their purpose and through our efforts assist them in attaining their business goals, not the least of which is to attract and retain the best talent.
13. Are large employers targeted first in audits and worker classification suits?
As evidenced in the presentation today, there are any number of task forces looking at targeting companies, industries, geographies and so on. Additionally, some states have incorporated provisions for “whistle-blowing”. The best advice is not to discount the unknown risks based on the size of your business, but to assume that if you are in business you are subject to audit. It only takes one claim for unemployment, or worker’s compensation, or FLSA to initiate an audit.
14. Can you provide some perspective on the best practices of fully compliant companies that regularly and effectively leverage the talent and expertise of ICs?
Most in this industry, if not all would suggest that most companies do not know how many contractors they’re using, what their doing, how long they have been doing it, let alone whether or not they truly qualify as an independent. This lack of process or policy is not necessarily due to the lack of desire or effort, it simply isn’t an area of expertise generally resident within companies, large, mid-size or small. And to further complicate a company’s effort, the guidelines/legislation is generally viewed as vague or ambiguous and changing. This is a growing field because companies learn from either an audit, requirements such as Sarbanes Oxley or legal challenges by “independents” that this is not a nice to have but a necessity and that it requires expertise, commitment, consultation and management that is best served by way of a business partnership.
15. Is it safer to simply abstain from using independent contractors?
Independent contractor use is growing and offers both the independent and companies access to expertise, talent, resource that would otherwise potentially not be available or accessible. To abstain from using independents could result in a competitive disadvantage. There are many benefits to engaging independents, including financial incentives. The best way to be “safe” is to employ sound process, procedure and policy. While this may not be available internally, this is certainly something that can be effectively outsourced.
16. Is there a basic (simple) criteria that immediately qualifies / disqualifies an IC?
The best way to simplify the process is to engage the expertise necessary to understand your business and integrate a solution that ensures you meet your business goals around talent acquisition and retention as well as legal compliance. A quick review of the various state and federal guidelines will reinforce that while the criteria might at face value seem or sound simple e.g., the ABC test, application is not as easy as 1,2,3 nor should it necessarily be so. The goal is to engage necessary talent rather than to qualify or disqualify. Appropriate application of various guidelines should result in consulting to achieve “qualified” status and/or in an alternative employment option—either way, the goal is to engage the talent.
17. Based on the NY activities, what can we expect in the short term?
Increased scrutiny of the classification and use of independent contractors in addition to other states adopting similar if not more severe methods, enforcement and penalties.
18. What is a good starting place for companies that want to learn how to step up compliance efforts and minimize risk regarding 1099 hiring practices?
Contact Secure Talent at info@securetalent.com to learn more about how our services deliver strong compliance and risk mitigation efforts to companies of all sizes and industries.