North Carolina is the latest state to join the nationwide crackdown on employee misclassification. In December 2015, North Carolina Gov. Pat McCrory signed executive order 83 – the employee and employer fairness initiative.
This executive order established the "Employee Classification Section" of the state's Industrial Commission whose mandate is to field complaints of employee misclassification and refer them to appropriate state agencies for further action.
To date, 26 states – including most recently Idaho, Alaska and Vermont, in addition to North Carolina – have joined forces with the Department of Labor in cracking down on businesses that misclassify their workers as independent contractors to avoid paying a host of taxes, benefits and other expenses.
In 2014 and 2015 the DOL provided state agencies with grants reaching $10 million to aid in the detection of employee misclassification and the enforcement of existing legislation. According to the DOL, “States will use these grants for a variety of improvements and initiatives, including enhancing employer audit programs and conducting employer education initiatives.”
Not just trucking and transportation
Although many recent high profile cases involve the trucking and transportation industries (most notably Uber and FedEx Ground), the range of industries being scrutinized by the IRS, DOL and state agencies is vast.
According to their annual report, the New York State Joint Enforcement Task Force on Employee Misclassification in 2014 conducted 12,000 audits and investigations and found 133,000 instances of employee misclassification. Over $316 million in unreported wages led to assessments of $40 million in unemployment insurance contributions.
The Task Force is focusing its attention on industries as diverse as Professional, Scientific and Technical Services, Ambulatory Health Care Services, Construction, Educational Services, the Performing Arts, Spectator Sports and even the Motion Picture and Sound Recording Industries.
What can you do to protect your business?
There are numerous courses of action you can take, including reclassifying your independent contractors as employees, sometimes taking advantage of certain state and federal amnesty initiatives.
However, according to a recent article published in Forbes, “For some companies, the quickest way is to reclassify independent contractors as employees or redistribute them through the use of staffing companies.”
The challenge, of course, is that staffing companies charge a hefty markup on any independent contractor they take under their wing. These staffing vendor markups are generally in the area of 30% and sometimes reach as high as 50%.
A more affordable alternative is to work with a contingent workforce management solutions provider who, for a nominal fee, will do the following:
- Conduct a detailed classification exercise
- Evaluate the risk profile for each category of worker
- Make strategic recommendations as to how to restructure the contractual relationship with the contractors
- Engage them on your behalf to create an arms-length relationship
- Manage the full contract lifecycle from engagement to termination
- Consolidate billing and payments to streamline administration
It's like a misclassification insurance
Some contingent workforce management solutions providers will not only bear the risk but will even indemnify you against any legal challenges that could arise. For that reason, care is taken to examine each class of workers, and each independent contractor, one by one (including scrutinizing their contractor agreement), then classify them according to their inherent risk profile, from low to high.
For all high-risk workers, the contingent workforce management company would generally recommend that you reclassify them as employees. For medium risk workers, a series of measures could be put in place to minimize the risk.
A detailed analysis of eligibility
When engaging a contingent workforce management solutions provider, you would be well advised to make sure that they analyze you entire independent contractor population and validate that each individual contractor is actually eligible to be classified as such. This is a detailed multi-step process that examines a series of factors.
At a minimum, independent contractor validation should consider the common law 20-factor test created by the IRS, which examines three broad categories of factors: behavioral control, financial control and the relationship of parties. You’ll find more details on these three categories in this recent HCMWorks Insights article on misclassification.
However, given the recent crackdown at the state level, these 20 factors are no longer enough. Factors to consider vary widely from state to state; some misclassification analysts count a total of 48 factors across the U.S. Independent contractor classification has become a complex undertaking that leaves no room for improvisation.
So beware of contingent workforce management companies – or staffing vendors for that matter – who simply conduct a cursory overview of eligibility and “take the contractors’ word for it” when classifying workers. It’s far more complex than it seems and the consequences of misclassification can be financially devastating.
Get ahead of the game
In summary, employee misclassification is a hot issue in a growing number of states, industries and sectors. No matter how good you think your contract is, you need to make sure that your independent contractors aren’t, in fact, employees as defined by federal and state agencies.
A detailed analysis of your embedded base of independent contractors is the safest route to take, short of reclassifying all of your independent contractors as employees. And the time to do this is now, before the Tax Man comes knocking on your door and finds you unprepared for the onerous consequences of employee misclassification.