Misclassification of members of a company’s workforce as 1099 Independent Contractors can create a significant liability to a company. The IRS has been expanding the number and scope of its audits with some estimates at more than 30% being focused on worker classification. We face a double edged sword, governmental entities are experiencing serious budget deficits forcing them to look for new sources of revenue. The Independent Contractors themselves may be a significant source of litigation.
Information and Risk Factors Associated with Employees Classified as Independent Contractors
- One-in-three companies fail a worker classification audit. Burden of proof is on the Client/Company
- Nearly 50% of the Independent Contractors reviewed by the IRS are determined to be misclassified
- Financial consequences: fines, penalties, interest payments, back taxes. (FedEx owed approximately $319 million in back taxes for tax year 2002 alone because of independent contractor misclassification issues)
- Reclassified Independent Contractor’s have to be treated as an employee for benefits. (Microsoft agreed to comply with payment of employment taxes on behalf of workers who had been classified as 1099 Independent Contractors for a specified tax period. Microsoft even hired some of the workers as employees. The group of these misclassified workers, now employees, demanded payment for benefits that they would have received for the period they were classified as independent contractors. In December 2000, Microsoft agreed to settle a suit for $97 million for the value of benefits)
- The real possibility of class action lawsuits by groups of Independent Contractor’s requesting employee status
- Legal defense takes years and can be very expensive
Some activities that may cause an audit
- Unemployment or Worker Compensation claims
- A W-2 and 1099 issued for the same worker by the same company in the same year
- New IRS Whistleblower Award Program
- All tax audits by the government require a 1099 audit to be conducted
- Independent Contractor lawsuit
For more information contact James Dyak, SPHR
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