Provided by: Judge Ruth B. Kraft
As I have written on previous occasions, regulatory agencies are focusing on independent contractor misclassification with increased vehemence in 2013. State laws now provide for both civil and criminal penalties, debarment from state contracts, presumptions in favor of employee status, and private rights to bring individual or class action lawsuits for misclassification. New York has taken particular aim at the construction trades. The use of independent contractors has dramatically increased over the past decade due to the economic advantages of designating workers as such. Employers are not required to withhold taxes, make Social Security and Medicare contributions, or pay unemployment and workers’ compensation premiums for independent contractors. Additionally, employee benefit plans including group health insurance and 401(k) plans only cover employees. Some employers intentionally misclassify workers but many have erroneous conceptions of the applicable laws. Independent contractors are typically referred to as freelancers, consultants, per diems, contractors, project workers, temps, specialists, etc. Sound familiar? Independent contractors are found in virtually every industry. It is estimated that 7.3 percent of the workplace is misclassified.
Liability for several years of unpaid withholdings, taxes and benefits, plus interest and penalties for non-compliance can break a business. Another costly liability for misclassification is the payment of health, pension and other employee benefits. The leading example is Microsoft which paid $97 million to settle a case brought by long-term temps who were purported ineligible to participate in its stock purchase plan.
How can an employer avoid such punitive risks? There are three alternatives: restructuring and redocumenting the relationship, reclassification, or re-distribution through a workforce staffing company.
- Restructuring: The first step in considering a restructuring is to diagnose whether the company’s independent contractors are properly classified. As a former judge at the New York State Department of Labor who has tried countless classification cases, I am in a unique position to evaluate these relationships. If restructuring is recommended, the next step is implementation, through independent contractor agreements which appropriately recognize the dynamics of the workplace relationship, revision of employee manuals and procedures, and putting safeguards in place to ensure conformity with the restructured relationship.
- Reclassification by government program or voluntarily: Have you received an audit notice or request for information from a state or federal agency? If so, only the foolhardy respond without the assistance of counsel. If a business concludes that reclassification is in its best interests, then it is essential that it be implemented in a manner that does not create an unfair inference of past non-compliance. Reclassification does not require that all workers previously excluded from an employee benefit plan be included prospectively and it is essential for management to coordinate with counsel and employee benefits experts to create a viable plan.
- Redistribution of workforce to a staffing company: To this point, this has been one of the simplest solutions to implement. However, a cautionary point: a recent court decision held both the putative employer and the staffing company jointly liable for misclassification. Therefore, I would not advise management to enter into such a plan without a comprehensive review of the relationship by legal counsel and “hold harmless” agreements.
In conclusion, inertia or inaction, waiting for the shoe to drop or for an audit to commence, is the riskiest option in the current regulatory environment. Compliance is far less costly on multiple levels than responding to claims. Kirschenbaum & Kirschenbaum’s attorneys are experienced in all aspects of compliance. For a comprehensive risk evaluation and recommendations, please contact Jennifer Kirschenbaum, chair of our compliance practice, at (516) 747-6700 ext.302 or via email to Jennifer@Kirschenbaumesq.com