Experts Weigh in on the IRS’s New Voluntary Classification Settlement Program

IRS ProgramOver the past week we have been following developments on the Labor Department’s crackdown on improper classification of workers, followed by the IRS’s announcement that a new program, the Voluntary Classification Settlement Program, will extend an opportunity for businesses to reclassify those employees. As the IRS stated in its September 21 press release, “Under the program, eligible employers can obtain substantial relief from federal payroll taxes they may have owed for the past, if they prospectively treat workers as employees. The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees.”

Some employers classify workers as independent contractors to avoid paying unemployment insurance premiums, overtime wages, Social Security and Medicare taxes, or workers’ compensation premiums.

Yet according to Russell Cawyer, a partner with Kelly Hart & Hallman, there may be a good reason that the VCSP sounds too good to be true. One disadvantage, he explains, is that despite the gesture of government leniency in providing a kind of amnesty for past mistakes, wage & hour plaintiff attorneys are not likely to be so forgiving.  “Participation in the IRS program will be tantamount to admitting that the workers were misclassified as independent contractors,” he said, introducing “all the baggage that goes along with such a misclassification.”

Cawyer provides the following analysis:

“Since companies rarely keep records of the hours worked by independent contractors, the newly classified employees can seek several years of unpaid overtime and the employer is unlikely to have any records to rebut the employees’ claims of hours worked.  Moreover, to the extent companies have benefit or incentive plans in which employees participate (but independent contractors do not), companies may face claims for benefits or other incentives (bonuses, options, stock etc.) that were not provided to the misclassified contractors.”

The IRS program is clearly a helpful opportunity for employers with improperly classified independent contractors to set things straight with payroll and personnel while mitigating the penalties they might have faced prior to the creation of VCSP.  Yet Cawyer feels that the program could have been more attractive – and gained better participation – if the agency had “included such protections for companies from the other negative consequences that come along from a misclassification of employees as independent contractors such as providing immunity from overtime, benefit or incentive claims for the period of misclassification or providing that agreements with the IRS shall not be admissible in any proceeding involving the company.”  He concludes that businesses will need to assess a complicated set of pros and cons in deciding whether it makes sense to enroll in the program.

Yet given the fact that the Labor Department has teamed up with the IRS and a growing number of states in a renewed effort to penalize businesses for wage theft, employers should weigh their options carefully. According to the Associated Press, the IRS collected $4 million in back wages on behalf of about 6,500 employees who were misclassified in 2010.  With 300 new investigators in the agency this year – all of whom will focus exclusively on probing wage theft complaints – we will likely see a significant increase in those numbers, along with the fees and penalties that accompany them.
Senior executive counsel for the National Federation of Independent Business, Elizabeth Milito, offers some useful tips to help businesses get a complex set of labor laws right:

No. 1: Be proactive. Milito suggests small business owners conduct an audit on their own companies and look into their current business practices.

“Take a look at their job descriptions to make sure the employees and their classifications are correct,” she said. “Don’t assume they are not entitled to overtime because they are salaried.” The Department of Labor has specific classifications for exempt and non-exempt workers, according to their job descriptions, she said.

No. 2: Prohibit off-the-clock work. Don’t let your non-exempt employees work overtime, unless they have specific permission from their managers. If employees continue to work non-authorized overtime, Milito said you may have to take action.

“This doesn’t mean you can deny them payment,” she said. “You still have to pay them for all of their time worked. But, you can take disciplinary action against the employee, up to and including termination.” Make sure you are communicating to your employees that these restrictions are for their benefit, Milito said, to ensure they are getting paid for all of their time worked.

No. 3: Investigate complaints promptly. If an employee alleges they are entitled to overtime, but you have classified them as exempt, be sure to launch an investigation.

“You need to take this seriously and contact a lawyer,” Milito said. “Also run through the Department of Labor rules and review their job descriptions. And notify the employee of the results of the investigation.”

Read more here:

« | »