The Invisible Workforce

Friday, October 21, 2011

No matter what you call them: independent contractors, freelancers, temporary, provisional or interim workers; the current economic conditions has bred an invisible workforce, many of whom are working for cash and off employers official payrolls. The IRS reported in 2005 that Americas under reported their incomes by some $1.3 trillion.  So significant an issue is this; that IRS actually has a chapter in its Audit Techniques Guide to assist examiners in reviewing for potentially non-reported and under reported incomes. While this may seem like a non-issue for employers, the IRS and states are just as concerned with employers who have misclassified workers as independent contractors and are thus under reporting Federal and state payroll taxes. Failure by an employer to properly classify workers as statutory employees and remit payroll taxes can lead to significant fines, back wages, legal fees, and potential civil or criminal sanctions.

Last month, the DOL, IRS and seven states signed a memorandum to share information on businesses who failed to remit payroll taxes. Non compliant businesses run the risk of getting hit by the DOL, IRS, and states for their violations. Focus is not just directed at misclassification, agencies are also looking at failure to comply with FMLA, Title VII, FLSA, and ERISA. Denial of participation in health, welfare, and retirement plans can carry penalties equal to or greater than failure to pay minimum wages and overtime.

Many employers have long appreciated the advantages of "alternative" work arrangements with independent contractors, contingent workers, consultants, "freelancers", and temporary staff because these arrangements often produce cost savings and increased flexibility. The temptation to classify a worker as an independent contractor can be great, considering that, employers do not pay unemployment insurance taxes, workers' compensation premiums, or the employer's portion of Social Security and Medicare taxes for independent contractors. In addition, such workers generally are not eligible for fringe benefits such as health insurance and retirement benefits. Independent contractors are generally not protected by most employment laws such as Title VII, the FLSA, and ERISA. Therefore, such workers often forego overtime wages, pensions, and protections from unlawful discrimination.

Stepped up enforcement has been under way for a couple of years. Beginning in 2009, Labor, Treasury, and IRS began an effort to audit some 6,000 organization to assess the possible tax violations. The current administration allocated some $25 million towards the efforts with the DOL reporting that it collected $172 million from April 2009 to March 2010 covering some 219,000 workers. If you do the math, you will see an almost 7 to 1 return on their investment.

New York, California, Connecticut, Iowa, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Hampshire, New Jersey, Oregon, Rhode Island, Utah, Vermont, and Wisconsin have all formed misclassification "task forces" to ferret out organizations, which attempt to evade state and federal payroll taxes. New York alone reported identified $157 million in unreported wages in its 2009 annual report. Massachusetts discovered $6.5 million in unpaid taxes from April 2009 thru March 2010. Moreover, this does not include the fines, penalties, legal fees, lost production, and administrative costs associated with these efforts in just two states. You can be assured, that in addition to these 16 states, there are 34 others states and the District of Columbia that are doing something similar or are preparing to act with a watchful eye.