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eTrends - Department of Labor and IRS Continue Efforts to Detect Employee Misclassification

09.29.2011

On September 19, 2011, the U.S. Department of Labor (“DOL”) and the Internal Revenue Service (“IRS”) signed a memorandum of understanding to improve employee misclassification compliance and education. Seven states also signed memoranda of understanding with the federal DOL; those states are Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington. In addition, the DOL announced that its Wage and Hour Division would enter into memoranda of understanding with the state labor agencies of Hawaii, Illinois, and Montana as well as with the Attorney General of New York. According to the DOL, the memoranda of understanding are to enable the DOL to share information and coordinate law enforcement with the IRS and participating states in order to ensure that employees receive the protections to which they are entitled under federal and state employment laws.

In a news release, Secretary of Labor Hilda L. Solis stated that the series of agreements are intended to send a coordinated message, “We’re standing united to end the practice of misclassifying employees.” IRS Commissioner Doug Shulman stated that the departments “will work together more efficiently to address worker misclassification issues and better serve the needs of small businesses and employees.” The DOL’s effort is part of the Department’s “Misclassification Initiative” launched under Vice President Biden’s Middle Class Task Force and has the goal of “preventing, detecting and remedying employee misclassification” according to the DOL’s press release.

Two days after entering into the memorandum of understanding with the DOL, the IRS announced a new Voluntary Worker Classification Settlement Program. The new program will provide employers an opportunity to comply with federal tax laws for formerly misclassified workers by paying a “minimal payment covering past payroll tax obligations” according to the IRS’s news release. The settlement program is designed to increase tax compliance. It is available to employers who currently erroneously treat their workers as non-employees or independent contractors and want to reclassify and correctly treat those workers as employees. In order to be eligible for the program an employer must: “consistently have treated the workers in the past as non-employees; have filed all required Forms 1099 for the workers for the previous 3 years; and not currently be under audit by the IRS, the Department of Labor, or a state agency concerning the classification of those workers.” An employer/taxpayer who participates in the program must agree to prospectively treat the workers as employees. “In exchange, the taxpayer will pay 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year.” IRS Announcement 2011-64. The employers will not be charged interest or penalties.

In light of the emphasis by federal agencies on correct worker classification, employers are well advised to carefully consider current classifications of their workers and confirm that workers are properly classified as employees or independent contractors.

Please contact Susan Parrott with any questions.

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Smith Anderson publishes eTrends periodically as a service to clients and friends. The purpose of this eTrends is to provide general information about a significant legal development in the field of employment law. Readers should be aware that the facts may vary from one situation to another, so the conclusions stated herein may not be applicable to the reader’s particular circumstances.

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