Proper classification of employees vs. independent contractors has always been an issue of concern for employers and regulators alike. From an employer's perspective, it is more cost-effective to treat a worker as an independent contractor than as an employee, since the employer does not have payroll tax and other employment-related employee benefits and other compliance costs. As such, employers are often tempted to categorize workers as an independent contractor relationship, but the legal standards for doing so are very fact-specific and relationship-based so an employer's level of compliance is not always entirely clear.
Of increasing employer concern, the Department of Labor (DOL), Internal Revenue Service (IRS) and several other state regulatory agencies recently announced a joint initiative that is designed to enable regulators to share information more freely and thus clamp down further on employers who misclassify employees as independent contractors. Other states have or soon will be developing similar programs. Based on these increased worker classification enforcement efforts by state and Federal agencies, it is imperative that all organizations review their worker classification processes and determine whether any workers have been misclassified. If such workers have been misclassified, the good news is that the Internal Revenue Service (IRS) has now announced a separate Voluntary Classification Settlement Program (VCSP) as a way to voluntarily treat workers as employees on a prospective basis at a reduced financial penalty, even if they have previously misclassified employees as contractors for several prior years. The IRS also issued a Q&A publication to further encourage employer usage of the VCSP program in lieu of risking a future state or federal audit.
For more information regarding the background and current status of regulatory guidelines pertaining to independent contractor worker relationships, current enforcement realities and the potential opportunities under the new VCSP program click here.
What Employers Should Do Now
For employers with any current or future workforce who are or may be treated as an independent contractor, careful analysis should be undertaken to evaluate whether such worker classification is appropriate under applicable state and federal laws. To the extent that such worker characterization is at all questionable, knowing the further scrutiny and joint efforts of several state and federal regulators to increase enforcement efficiency in this area, you should seek advice and counsel to determine the most appropriate course of future action, as well as evaluate whether compliance with the new IRS VCSP program is beneficial to your organization on a going forward basis.
For More Information
For further guidance on worker classification or participation in the VCSP, please contact:
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