Labor Commissioner & Consumer Affairs Alert Garden State Accountants on Misclassification this Tax Season (NJ)

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Labor Commissioner & Consumer Affairs Alert Garden State Accountants on Misclassification this Tax Season

Misclassifying workers as 1099 independent contractors denies benefits and costs the state

March 20, 2019, 4:41 pm

TRENTON – This tax season, the New Jersey Department of Labor and Workforce Development, in conjunction with the New Jersey Division of Consumer Affairs, sent a letter to Garden State accountants reminding them of the legal standard for proper classification of employees and reinforcing the state’s commitment to ending worker misclassification.

By misclassifying workers as independent contractors – workers who receive 1099s, not W-2s – employers avoid paying unemployment and disability taxes, costing state and federal taxpayers untold millions of dollars. In New Jersey alone, auditors have identified more than $80 million in underreported employer contributions since 2010.

“One of the Labor Department’s primary responsibilities is protecting workers from unscrupulous business practices, and supporting responsible businesses by ensuring everyone plays by the same set of rules,” said Labor Commissioner Robert Asaro-Angelo. “We are engaging New Jersey’s accounting professionals to send the message to employers that they are not able to shirk their responsibilities simply because they have unlawfully elected to use a particular form.”

Workers misclassified as independent contractors are ineligible for the wage and overtime protections and benefits afforded to employees, and can find themselves underpaid and without basic labor and OSHA protections. Additionally, independent contractors are not covered under the National Labor Relations Act, which makes it more difficult for them to organize and collectively bargain with an employer.

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SEATTLE CITY COUNCIL TARGETS IC MISCLASSIFICATION, GIG ECONOMY (WA)

Posted by National Alliance for Fair Contracting on

February 22 2019

The Seattle City Council passed a resolution this week targeting the misclassification of workers as independent contractors when they should be designated as employees.

The lawmakers requested semi-annual updates to the Council, starting at the end of this year’s third quarter, on what the Office of Labor Standards and Labor Standards Advisory Commission is doing to investigate and correct misclassifications.

“There are more and more employees who are being categorized as contractors and are not eligible to receive access to our labor laws,” Councilmember Lisa Herbold during Tuesday’s meeting, GeekWire reported. She said she had ongoing conversations with a driver for Amazon Flex, human cloud platform that enables drivers to deliver packages with their own cars.

“Companies pay the drivers to do the work of employees but treat them as independent contractors, denying them basic amenities like healthcare benefits [and] worker compensation,” Herbold said.

The resolution asks the Office of Labor Standards, the city department that investigates and enforces the city’s labor laws, to:

  • Propose policy solutions to help address this issue of misclassification.
  • Develop enforcement strategies and subject matter expertise to resolve misclassification inquiries and complaints
  • Develop outreach and education strategies for the Office of Labor Standards to inform workers and employers.
  • Work with the Office of Intergovernmental Relations on those issues most appropriately addressed by the state, and incorporate them into the city’s 2020 State Legislative Agenda.
  • Work with experts in employment law to perform a thorough legal analysis on ways to mitigate the adverse impact of the Supreme Court’s decision in Epic Systems Corp v. Lewison Seattle workers’ ability to band together to challenge an employer’s illegal acts.

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Department of Labor v. Department of Revenue Services: Employee, Independent Contractor, or Both (CT)

Posted by National Alliance for Fair Contracting on

February 7, 2019

For years now, the Connecticut Department of Revenue Services (DRS), the Connecticut Department of Labor (DOL) and the Internal Revenue Service (IRS) have been targeting Connecticut employers for worker misclassification audits. When a misclassification is discovered, these government entities can share information about employers who have misclassified employees as independent contractors. Thus, when one of these government entities finds a misclassification during an audit, audits from the other governmental entities are likely to arise.

When a misclassification is discovered, the employer will be subjected to various federal and state taxes, penalties and interest charges. A misclassification occurs when an employee is incorrectly treated as an independent contractor. As a result, the worker does not have income taxes or payroll taxes withheld from his/her pay and is not issued a Form W-2. Businesses aren’t the only employers targeted for such audits. Charitable organizations, public school systems, cities, towns, and even State departments are subject to audit.

The IRS and the DRS have historically used a 20-factor test to determine if a worker is an employee or independent contractor. The factors are used to determine if the service recipient has the right to control the service provider, not only as to the result to be accomplished, but also as to the details and means by which that result is accomplished. If such control is found, the worker is deemed to be an employee. The 20 factors are used to determine if the service recipient has behavior, financial, or relationship control of the worker. We refer to this as the “IRS Control Test”. The DRS uses the IRS Control Test.However, the DOL, uses a stricter three-part test for determining if a worker is an independent contractor referred to as the “ABC Test.”

…

This results in the absurd situation in which a worker is treated as an independent contractor for income and payroll tax purposes and as an employee for DOL purposes, such as unemployment insurance, workers compensation, fringe benefits and labor and employment laws.

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Mayor Kenney Signs Philadelphia Fair Workweek and Minimum Wage Bills Into Law (PA)

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The National Law Review
Thursday, December 27, 2018

Philadelphia Mayor Jim Kenney signed two bills last week that provide affected employees in the City with more scheduling certainty and higher wages.

The first bill, the Fair Workweek Employment Standards Ordinance, requires employers with at least 250 employees and 30 locations worldwide in the retail, food services, and hospitality industries to provide their employees with more certainty regarding their work schedules, among other reforms. For more information on the Fair
Workweek Ordinance, please see Ballard Spahr’s prior alert.

The Philadelphia Minimum Wage Bill, which amends the 21st Century Minimum Wage Standard Ordinance, is much broader and will increase the minimum wage for all City employees, contractors, and subcontractors beginning next summer.

Starting July 1, 2019, the wage bill will gradually raise the minimum wage from the current $12.20 an hour to $13.25. The wage will increase to $13.75 an hour on July 1, 2020, $14.25 an hour on July 1, 2021, and $15.00 on July 1, 2022. After that, the minimum wage standard will continue to rise based on annual consumer price index adjustments.

The increased minimum wage will apply to all City employees and to employees of covered employers, including those that are recipients of City concessions, franchises, and leases, as well as recipients of City financial aid. Financial aid recipients include all persons or entities that receive direct City assistance of more than $100,000 in any 12-month period. City financial aid recipients must comply with minimum wage increase requirements for five years after their receipt of financial aid. Benefits incidental to City policies, regulations, ordinances, or charter provisions are not considered City financial aid.

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Mass. SJC Rules Independent Contractor Statute Doesn’t Apply in Workers’ Comp Case (MA)

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By Elizabeth Blosfield | May 16, 2018

The Massachusetts Supreme Judicial Court (SJC) has ruled the state’s independent contractor statute does not determine whether a claimant is an employee eligible for workers’ compensation benefits in a case that has led to questions about worker misclassification.

“Worker misclassification is a serious problem, both in our Commonwealth and across the nation,” SJC Chief Justice Ralph Gants wrote in a concurring opinion regarding the case.

This issue has come to light after a recent case involving claimant Ives Camargo, in which she sought review of a decision made by the reviewing board of the Department of Industrial Accidents regarding a claim she made for workers’ compensation benefits.

The board had affirmed the findings of an administrative judge by concluding Camargo was an independent contractor not entitled to workers’ compensation. Its decision was based on the definition of an employee in Massachusetts’ workers’ compensation statute.

“The law governing employment relations in this state remains far from uniform.”

After Camargo appealed, the case was transferred to the SJC, which upheld the decision that she is an independent contractor not eligible for workers’ compensation.

In the wake of the case, however, Gants called for the Massachusetts Legislature to consider greater uniformity among laws that classify workers. He added that part of the challenge in preventing misclassification is that there is no uniform definition of an employee. Instead, the law defines employees and independent contractors by several different standards depending on the context.

“In 2004, the Massachusetts Legislature took a significant step toward harmonizing these standards, amending the independent contractor statute…so that its presumption in favor of employee status applied not only to the wage and hour laws….but also to the minimum wage and overtime laws,” Gants wrote. “However, the law governing employment relations in this state remains far from uniform.”

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bill-would-allow-cities-counties-to-opt-out-of-prevailing-wage

AG Healey Leads Multistate Effort to Curb Misclassification of Workers

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FOR IMMEDIATE RELEASE: 4/30/2018
Office of Attorney General Maura Healey
The Attorney General’s Fair Labor Division

The following are excerpts from the release:

Attorney General Maura Healey today led a coalition of 12 state attorneys
general in filing a brief to the National Labor Relations Board in support of a decision that
misclassification of employees as independent contractors constitutes an unfair labor practice in violation of the National Labor Relations Act.

…

“Employers that misclassify their employees cheat local and state governments from
collecting millions in taxes each year and create an unfair playing field for others,” said AG Healey. “I urge the National Labor Relations Board to uphold the decision in this case.”

According to the brief, misclassification is an increasingly common way for employers
to avoid their legal obligations to employees and to unfairly compete in the marketplace.
When employers misclassify their workers as independent contractors, it is significantly
harder for those employees to assert their workplace rights, including protections from wage theft, harassment and discrimination. Misclassified workers are also denied Occupational Health and Safety Act protections, and are unable to form unions, collectively bargain for wages and benefits, or join in concerted efforts to improve conditions in their workplace without fear of reprisal from employers.

Employers that misclassify their workers are also able to avoid paying unemployment
insurance and contributing to the worker’s compensation system, which poses significant cost in terms of lost revenue for state, local, and federal government. According to two studies cited in the brief, Massachusetts loses an estimated $259 million to $278 million annually, $87 million of which is in unpaid unemployment insurance taxes, because of misclassification. In 2015, the Massachusetts Council on the Underground Economy reported recoveries of more than $50 million from employers who misclassified their employees from 2013 to 2015.

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The coalition of state attorneys general submitted today’s brief at the invitation of the National Labor Relations Board. Massachusetts and Pennsylvania led today’s brief, joined by Connecticut, Illinois, Maryland, Minnesota, New Jersey, New Mexico, New York, Oregon, Virginia and Washington.

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Labor organizations rally against wage theft and employee misclassification Station Row project in Providence

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April 22, 2018
Steve Ahlquist

The International Union of Painters and Allied Trades (IUPAT) District Council 11 held a rally Saturday afternoon in partnership with Fuerza Laboral and Rhode Island Jobs With Justice at the site of Trilogy Development’s Station Row project being built by Tocci Construction at Smith and Canal Streets in Providence.

Trilogy has received $5.6 million in public subsidies in the form of a Tax Stabilization Agreement (TSA) from the City of Providence, but, say leaders of the Saturday rally, Trilogy and Tocci have “sadly decided to use the broken model of open shop sub contracting,” adding, “Construction workers employed in the open shop model are at a greater risk of suffering substandard wages and benefits.”

“Wage theft, employee misclassification, tax and insurance fraud are all still far too
common in the industry in Rhode Island and across the country. While unionized contractors can be found to break the law as well as open shop contractors, the collective bargaining agreements in place give workers the ability to assert their rights and get remedy of grievances” said Raul Figueroa of Fuerza Laboral.

In September 2015 open shop contractor Cardoso Construction came to settlement around wage theft to pay more than $730,000 in back wages, interest and penalties under a settlement agreement with the Rhode Island Department of Labor and Training (DLT)’s Workplace Fraud Unit.

Rhode Island’s Underground Economy and Misclassification Task Force reported in 2016 that “the Division of Taxation found that 673 employees had been improperly classified as independent contractors instead of employees in 2015, ordering the offending companies to pay more than $220,000 in taxes.”

Rhode Island’s Underground Economy and Misclassification Task Force reported in 2017 that “six construction companies entered into settlement agreements with DLT where they admitted to misclassifying 33 workers on four separate construction projects “and that “The Division of Taxation found that 590 RI employees had been improperly classified in 2016, resulting in almost $5.6 million in unreported wages and an assessment of $200,988 in additional state taxes.”

“When low road employers are allowed to cheat with impunity it undercuts not only worker’s wages and conditions but also legitimate contractors who are looking to compete in doing honest business”, said IUPAT District Council 11 Business Representative Justin Kelley, noting that these issues cause a cycle of exploitation and poverty and starve our municipal and state governments of much needed revenue.

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Report: Worker-misclassification fight nets $1.4M

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By: Erika Strebel
March 16, 2018 1:25 pm

In 2017 alone, Wisconsin’s work to crack down on employers who misclassify workers as independent contractors instead of direct employees has netted nearly $1.4 million.

Because of seasonal layoffs that can muddy the distinction between permanent employees and someone hired for a specific job, worker misclassification is believed to be rampant in the construction industry.

Industry officials have said deliberate misclassification not only deprives the state of taxes and other resources but also gives dishonest companies an unfair advantage by letting them avoid costs that their more honest rivals roll into bid prices.

In 2017, the DWD continued its crackdown on misclassified workers, identifying 6,230 of them and collecting $1.4 million dollars that went back into the state’s unemployment-benefits system, according to a report released by the state Department of Workforce Development. The department also reported conducting 500 field investigations into worker misclassification.

About this same time last year, state officials had reported recovering nearly $1.13 million over the course of more than three years. The state started ramping up its enforcement of worker-misclassification laws in May 2013.

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Worker Classification Update

Posted by National Alliance for Fair Contracting on

J.D.Supra
Labor & Employment Law, Taxation
July 26, 2017

On July 20, 2017, the Internal Revenue Service (“IRS”) issued a reminder for small businesses on the importance of correctly classifying workers as employees or independent contractors. Employers failing to do this correctly may face penalties, including trust fund penalties, from the IRS, which can be assessed not only against the employer but also against officers and directors. Classification is important because an employer must withhold income taxes and pay Social Security, Medicare taxes, and unemployment tax on wages paid to workers who are employees, but independent contractors are instead subject to self-employment tax.

Employers must look at the facts in each situation. The IRS has reminded small businesses to focus on three categories to properly classify workers: (1) behavioral control, (2) financial control, and (3) the relationship of the parties. A worker is properly classified as an employee if the employer exercises significant behavioral and financial control over the worker such as controlling the manner of work by giving the worker instructions or training and providing the worker with the tools necessary to complete the work. Also, if the employer and the worker have a permanent working relationship and the employer provides the worker with benefits such as a pension plan or vacation pay, the worker properly would be classified as an employee. On the other hand, a worker should be treated as an independent contractor if the worker has autonomy on deciding the manner of work and amount of hours to work, works for multiple employers, or does not retain a permanent relationship with the employer. These factors all reflect a 20-factor test established by the IRS in Revenue Ruling 87-41.2

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Labor Commissioner’s Office Files $6.3 Million Misclassification and Wage Theft Lawsuit against Glendale Construction Company (CA)

Posted by National Alliance for Fair Contracting on
PR Newswire

Aug. 14, 2017, 01:55 PM

LOS ANGELES, Aug. 14, 2017 /PRNewswire-USNewswire/ — The Labor Commissioner’s Office has filed a lawsuit against Calcrete Construction, Inc. seeking $6,300,338 for multiple wage theft violations affecting a group of 249 construction workers and the willful misclassification of 175 workers as independent contractors.

An investigation launched in October 2016 uncovered the Glendale-based company’s failure to pay the workers for overtime hours, allocate pay for sick leave and provide proper wage statements. The lawsuit, filed in Los Angeles Superior Court, also seeks civil damages and penalties.

Beginning in August 2016, Calcrete forced its workers under threat of termination to sign contracts stating they were independent contractors. The company then used staffing agencies Dominion Staffing and Southeast Personnel Leasing to pay the workers.

“It is illegal for employers to use subcontractors to distance themselves from the obligation to pay workers, and we will use every tool to dissuade employers from this scheme,” said Labor Commissioner Julie A. Su. “This lawsuit aims to recover the money these misclassified workers should have been paid after years of wage theft.”

Calcrete employees typically worked 10-12 hours Monday through Friday and eight hours on Saturday. They were paid only their regular hourly rate and not for the 18-28 hours of overtime they regularly worked. This underpayment occurred for a nearly two- year period from 2014-16, the lawsuit specifies.

The lawsuit seeks:
  • Wages and damages of approximately $2,596,438 payable to the workers:
    • $352,000 in overtime wages
    • $1,244,438 in waiting time penalties
    • Over $1,000,000 (specific amount to be determined at trial) for unpaid sick leave and liquated damages
  • Penalties of approximately $3,703,900 payable to the state:
    • $2,625,000 in statuary penalties for willful misclassification
    • $78,900 in civil penalties.
    • Over $1,000,000 (specific amount to be determined at trial) for failure to provide proper wage statements

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